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Ties That Bind
2014 Edition
The San Francisco Bay Area’s
Economic Links to Greater China
A Bay Area Council
Economic Institute Report
Sean Randolph
President & CEO
Bay Area Council Economic Institute
Niels Erich
Global Business/Transportation Consultant

Contents
PREFACE: Assessing China and the Bay Area...........................................................................v
Tracking an Evolving Relationship................................................................................vi
Executive Summary...............................................................................................................vii
Economy......................................................................................................................vii
Students.......................................................................................................................vii
Professional Networks ................................................................................................ viii
Trade and Tourism ..................................................................................................... viii
Affiliates and Invention............................................................................................... viii
Key Sectors...................................................................................................................ix
Architecture and Urban Planning .......................................................................ix
Energy/Environment...........................................................................................ix
Cleantech............................................................................................................ix
Banking/Finance ..................................................................................................x
Mobile/Internet....................................................................................................x
Law.......................................................................................................................x
Life Sciences/Health Care...................................................................................xi
Investment ..........................................................................................................xi
Connectors ...................................................................................................................xi
Paths Forward..............................................................................................................xii
Conclusion...................................................................................................................xii
1. CHINA’S ECONOMY: Slower, but More Diversified ............................................................... 1
In 2006.......................................................................................................................... 1
Today............................................................................................................................ 2
The 12th Five-Year Plan ............................................................................................... 7
Economy............................................................................................................. 7
Environment/Energy........................................................................................... 8
Agriculture .......................................................................................................... 8
Investment Reform ............................................................................................. 8
Livelihood ........................................................................................................... 8
2. THE BAY AREA CHINESE COMMUNITY: Beginnings ................................................................. 9
Chinese Communities Take Shape .............................................................................. 9
The 1906 Earthquake ................................................................................................. 10
Two-Way Trade Grows............................................................................................... 11
The Immigration Profile Changes............................................................................... 11
3. CHINESE STUDENTS AT BAY AREA UNIVERSITIES: Land of Opportunity................................... 13
Numbers Tell the Story .............................................................................................. 13
Education as an Investment ....................................................................................... 14
Student Trends ........................................................................................................... 16
Unintended Consequences........................................................................................ 18
“Sticky” Students ....................................................................................................... 20
Cross-Border Academic Collaboration Runs Deep.................................................... 22

Endowments............................................................................................................... 23
Visas: The School-to-Work Transition..................................................... 24
4. PROFESSIONAL NETWORKS/ASSOCIATIONS: Staying Connected........................................... 27
The Asia Foundation: Supporting Development and Reform................ 31
5. TRADE AND TOURISM: Poised for a Breakout? .................................................................... 35
Drilling Down to the Regional Level ......................................................................... 37
Strong Export Potential for California Wine ........................................... 42
A Matter of Geography .............................................................................................. 44
Up in the Air ............................................................................................................... 44
U.S.-China Trade in Perspective................................................................................. 44
Policy Concerns .......................................................................................................... 46
A Nascent Two-Way Tourism Trade........................................................................... 47
Tourism Trends........................................................................................................... 48
Rolling Out the Red Carpet........................................................................................ 49
6. GROWING BUSINESS TIES: Affiliates and Invention .............................................................. 51
Business Presence ...................................................................................................... 51
Research Collaboration .............................................................................................. 51
Financial Investment................................................................................................... 51
7. KEY INDUSTRY SECTORS: A New Set of Synergies ............................................................... 55
ARCHITECTURE AND URBAN PLANNING: From Buildings to Towns and Districts... 55
ENERGY/ENVIRONMENT: Small Steps Matter....................................................... 61
CLEANTECH: A Bright Future…Someday........................................................... 67
BANKING/FINANCE: Slow Money ........................................................................ 71
MOBILE/INTERNET: Everything Is Interconnected ............................................... 76
Game Strategy........................................................................................ 79
The Foxconn Connection ....................................................................... 84
The Taiwan Tech Community Plans its Future........................................ 86
LAW: The Wild West Settles Down ................................................................... 88
LIFE SCIENCES/HEALTHCARE: Healthy Prospects.................................................. 91
INVESTMENT: A Two-Way Street ........................................................................ 96
8. CONNECTORS: Building New Bridges.............................................................................. 109
A New Kind of Overseas Office ............................................................................... 109
The Asian Art Museum: Come for the Art ............................................ 112
The EB-5 Advantage ................................................................................................ 113
Two Local Examples ....................................................................................... 115
Paths Forward..................................................................................................................... 119
Higher Education............................................................................................ 119
Tourism ........................................................................................................... 119
Immigration .................................................................................................... 119
Energy and Climate ........................................................................................ 120
Investment ...................................................................................................... 120
Connectors ..................................................................................................... 120
Conclusion................................................................................................................ 120
Acknowledgments.............................................................................................................. 121
Sources............................................................................................................................... 123

PREFACE
Assessing China and the Bay Area
In November 2006, the Bay Area Council Economic
Institute (then the Bay Area Economic
Forum) released Ties that Bind, a report that examined
the longstanding commercial and cultural
ties between the San Francisco Bay Area and
greater China.
The report was a first-of-its-kind effort to
document a unique economic relationship that
began with the arrival of the first Chinese immigrants
at San Francisco’s docks in 1849. These new
arrivals sought—and found—both an escape from
overpopulation and famine after the Taiping
Rebellion, and an often difficult fresh start as miners
and prospectors in the Gold Rush, as contract
labor for railroads and canneries, as fishermen, or
as workers in—and owners of—small businesses.
We began with this history, discussing successive
waves of Chinese immigrants to the Bay Area;
the formation of Chinatowns with clusters of
Chinese-owned businesses; the rise of family
benevolent associations and later, a dramatic
expansion of business and home ownership.
The central focus of Ties that Bind, however,
was on a converging set of trends in the 1980s
and 1990s, and how they were reflected in
the economy:
an influx of science and engineering graduates
from elite universities in Taiwan, Hong Kong
and mainland China, often government-supported,
who were drawn by world-class universities
and by opportunities in Silicon Valley;
a recognition by governments, state-owned
enterprises and family-owned industrial
conglomerates throughout greater China
that emerging information technologies
were the key to moving their industries up
the value chain;
a strategy among wealthy Chinese families
to invest in educating the next generation,
exposing them to a wider world and new
ideas, but also establishing an overseas
foothold amid political uncertainty;
a nexus of cross-border Chinese professional
networks and access to venture capital, which
combined to produce new technology startups
and cross-border innovation.
Ties that Bind studied the infrastructure that
developed around and behind this cross-border
collaboration—student trends; alumni connections;
professional associations and the linkages among
their members, sponsors, investors and foreign
government sponsors; cross-border collaboration
between research clusters; and the evolution of
this ecosystem through redeployed capital, university
endowments and business mentorship.
We went on to study two-way flows of trade
and investment, and focused on opportunities
and obstacles for companies active in China in
key industry sectors: finance, law, the Internet,
information technology and computing, architecture
and urban planning, advertising, energy,
environmental protection and life sciences. In
each case, we tried to present a balanced picture
of market and regulatory conditions in China for
the sector in question, accompanied by interviews
and case studies highlighting firms’ experiences
on the ground.
We considered venture, private equity and
portfolio investment trends, examined high-profile
cases of direct investment by Bay Area firms in
China, and discussed early examples of Chinese
firms attempting to establish footholds in the U.S.
market, achieve global scale and take advantage
of synergies by merging with, acquiring or buying
stakes in Bay Area firms.
Finally, the report laid out a set of guiding
principles, strategies and recommendations for
policymakers at all levels of government to
consider, in order to grow and deepen the Bay
Area-China economic relationship. These involved
education and workforce training, funding
of basic research, visa policy, trade, tourism
and investment promotion, and freight infrastructure
improvements.
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Ties That Bind, 2014 Edition
Tracking an Evolving Relationship
Much has happened since late 2006. The global
economic downturn has slowed demand for
China’s exports and accelerated an internal shift
toward indigenous innovation and increased domestic
consumption. A new Five-Year Plan
through 2015 emphasizes continued urbanization;
cleaner energy, air and water; and a more
robust healthcare and pension safety net. And
China is increasingly venturing out into the
world—encouraging even state-owned firms to
raise private capital and invest overseas and enter
new markets.
California, for its part, has demonstrated its
capacity to innovate—in biofuels and energy
conservation, cloud computing and big data,
biomedicine and genomics, nanomaterials and
mobile communications.
These trends suggest both a converging
set of interests and new opportunities as the
Bay Area and China build on their close 160-
year relationship.
In this 2014 update of Ties That Bind, we
revisit earlier educational and institutional
relationships, professional networks, trade and
investment flows, and business connections by
sector, to understand what has changed in the
past eight years. In doing so, we also consider
new sectors that have developed significant
connections with China, including clean energy
technology, digital media and cloud computing.
We examine new initiatives—some of them
having grown out of the original Ties That Bind
report—that have capitalized on synergies among
cities, institutes, universities and companies in the
Bay Area and greater China.
We assess the new opportunities presented by
the rising tide of outbound Chinese investment.
Finally, we re-examine earlier policy issues and
recommendations and report changing conditions,
progress made, and new concerns to
monitor or address.
The first edition of Ties That Bind found a
level of connection between the Bay Area and
China that is unique in its depth and breadth.
Our conclusion was that this relationship—historical,
cultural and economic—represents a
major opportunity for the region. While no report
can fully capture such a deep and complex
relationship, in this new edition the Institute
once again highlights for businesses and policymakers
the key market dynamics, deals, firms
and innovators that form the close and lasting
economic bond between the San Francisco Bay
Area and China.
vi

Executive Summary
China and the San Francisco Bay region enjoy a
160-year relationship dating back to the first arrival
of immigrants during the Gold Rush. New
arrivals came in the tens of thousands, built railroads,
panned for gold, fished the Bay, worked as
servants, started businesses and built thriving
communities in San Francisco, Oakland, San Jose,
Sacramento and the Delta.
Since then, successive waves of immigrants
from Hong Kong, Taiwan and mainland China have
made important contributions to the regional
economy—as business owners, and most recently
as entrepreneurs with advanced degrees in science,
technology, engineering and mathematics.
The Bay Area has also contributed to China’s
development as a global economy. The region’s
universities, research laboratories and companies
have played a role in building China’s Internet;
reforming its legal and judicial systems; planning
new, sustainable buildings and communities; and
supporting entrepreneurial growth.
China’s admission into the World Trade Organization
(WTO) in 2001 marked the beginning of an
explosion in investment and trade that changed
the global landscape, stimulating massive investment
in China—primarily in manufacturing—and
generating large Chinese trade surpluses that have
produced more than $3 trillion in foreign exchange
reserves. The 2008–09 recession marked a change,
however. Nearly two decades of double-digit GDP
growth ended, and with it the dramatic expansion
in U.S.-China trade. Trade growth has resumed but
is slower; the assumption of a continuous and
steep upward economic trajectory has given way
to new pragmatism.
Within China, the largest mass rural migration
to cities in world history is continuing. Rising
wage and land costs are pushing new industrial
development away from highly developed cities
such as Beijing and Shanghai, to Tier 2, Tier 3
and interior cities. And a growing and sometimes
restive middle class is pressing the government
for improved working conditions, a cleaner
environment, a stronger social safety net and
continued upward mobility.
These trends point to important synergies,
as the San Francisco Bay Area is a global center
for much of the talent, innovation and
technology crucial to China’s continued economic
transformation.
Economy
China’s economy is slowing and becoming
more diversified.
Urbanization is driving growth, which is moving
inland. This massive shift will continue,
with another 200 million Chinese moving to
urban centers in coming decades.
China’s labor force has shifted from agriculture
to manufacturing and services, serving
both export markets and a rapidly emerging
middle class.
The economic, social and environmental implications
of these shifts will be profound—with
growth in incomes and markets, but also environmental
challenges.
Students
Chinese students have made an important
contribution to the region’s economy. Many
have chosen to remain in the area after
graduation, supporting technology innovation,
launching start-ups, and becoming angel
and venture investors.
China contends with India as the top source of
students from overseas.
The number of students in the Bay Area from
greater China—the People’s Republic of China
(PRC), Taiwan and Hong Kong—has grown
from approximately 5,500 in 2004–05 to an
estimated 7,000 in 2011–12.
Tuition, living expenses and other spending in
2011–12 by Chinese students enrolled in Bay Area
colleges and universities contributed nearly $219
million to the state and regional economies.
The Bay Area’s elite universities continue to
attract top talent, primarily at the graduate
level where students concentrate in science
and technology.
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Ties That Bind, 2014 Edition
Stanford has opened a facility in Beijing,
and Berkeley has a research presence
in Shanghai.
Undergraduate enrollment at Bay Area universities
by Chinese students is up dramatically,
helping budget-strapped schools.
This has raised new issues, however, as many
undergraduates show up unprepared, scholastically
and in English language proficiency.
Reported endowments from Chinese donors
to Berkeley and Stanford in the past two
decades total more than $150 million.
Professional Networks
Professional associations provide robust entrepreneurial
and business networks, offering
information, mentorship and access to business
opportunities.
Associations such as the Asia America
MultiTechnology Association (AAMA), the
Hong Kong Association of Northern California,
the Monte Jade Science and Technology
Association, the Hua Yuan Science and
Technology Association (HYSTA), and the
Chinese American Semiconductor Professional
Association (CASPA) continue to thrive
and have evolved their offerings as member
interests and the channels for access to China
have grown.
New associations have been added to the
region’s already rich landscape of Chinarelated
organizations. The Chinese Enterprise
Association, for example, helps more than 80
large mainland firms with a Bay Area presence
stay current on technology advances and connect
with business and government leaders.
The Taiwanese American Industrial Technology
Association (TAITA) promotes Taiwan-
Silicon Valley exchanges.
Trade and Tourism
Trade with China is growing, but more slowly
than in recent years.
Between 2006 and 2012, U.S. exports to China
doubled to $110.5 billion; imports from
China increased by nearly 48 percent, to
$425.6 billion.
Nearly $18 billion in imports from China and
$6.4 billion in exports to China passed through
Bay Area ports and airports in 2012. About $4
billion of that $6.4 billion originated in the
region (the balance being goods in transit.)
While Bay Area trade with the PRC and Taiwan
has recovered to 2008 levels, imports from
Hong Kong have declined by half, as more cargo
moves directly to and from mainland ports.
As China’s middle class broadens its horizons,
the number of Chinese travelers to the U.S. is
growing. The Bay Area is a prime destination.
From 2008 to 2012 the number of Chinese
tourists visiting the U.S. grew from 275,000 to
nearly 1.5 million, enabled by the Chinese
government’s granting of “approved
destination status” for the U.S. and the U.S.
government’s streamlining of visa processing
in China.
SF Travel estimates that the city hosted 198,000
visitors from mainland China in 2011, 60,000
from Taiwan and 50,000 from Hong Kong. The
association has offices in Shanghai and Beijing.
The profile of Chinese tourism is shifting from
lower-end packaged tours to more and
wealthier Chinese traveling as individuals.
Hotel chains such as Hilton, Starwood and
Marriott have introduced Chinese-friendly
services at locations popular with Chinese
tourists, including the Bay Area.
Four airlines—United, Cathay Pacific, Singapore
and Air China—offer a combined 49 nonstop
weekly flights to Hong Kong, Beijing and
Shanghai through SFO, with a capacity of more
than 16,000 passengers. In 2013 China Eastern
Airlines began daily non-stop flights to Shanghai,
with continuing same-plane service to Wuhan
and Qingdao, adding over 1,600 seats per
week. In 2014, United Airlines will launch sameaircraft
service to Chengdu, via Shanghai, and
will reinstate non-stop service to Taipei.
Affiliates and Invention
Cross-border investment and collaborative
innovation are growing. The presence of Chinese
companies in the Bay Area is increasing,
as is the presence of Bay Area businesses
in China.
The Bay Area is home to 96 affiliates of companies
from Taiwan, 51 from China, and 38
from Hong Kong.
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Executive Summary
The PRC ranks second among the top sites for
Bay Area businesses abroad. Currently there
are 795 Bay Area affiliates located in the PRC,
plus 303 in Taiwan and 216 in Hong Kong.
Collaborative patenting activity with Chinabased
inventors represents a growing percentage
of total foreign co-patenting in the
region, expanding from less than 1 percent in
2002 to 9.9 percent in 2012.
Investment from the Bay Area to China reached
$2.7 billion in 2011, representing 38 percent
of all Bay Area investment abroad in that year.
China is also a growing investor in the Bay Area,
with $495 million invested in 2011, or 7 percent
of all foreign private equity and venture
capital flowing to the region.
Key Sectors
While China remains an important manufacturing
base and markets continue to grow, Chinese objectives
have broadened to include indigenous
innovation and the creation of globally competitive
Chinese brands. As a result, today’s business
environment is increasingly complex.
Architecture and Urban Planning
Bay Area architecture and planning firms have
brought cutting-edge design and sustainability
principles to Chinese cities, as China has embraced
daring forms and sustainable design, with
planning and construction taking place on an
extraordinarily scale. In the last decade, Chinese
demand has helped keep a number of Bay Area
firms afloat, particularly as new construction in
California and the Bay Area contracted, and as
China’s stimulus spending ramped up. A revival
of construction in California and the Bay Area
now offers increased opportunity at home, but
Bay Area architecture and planning firms remain
in demand due to their prestige and reputation
for leadership in sustainable design.
Key projects include Gensler’s Shanghai Tower,
China’s tallest, and the China headquarters of
Internet portal Tencent; Skidmore Owings and
Merrill’s Huawei Technologies Corporate Campus
and the Knowledge and Innovation Community
technology park in Shanghai; Heller Manus’ China
Automotive Technology & Research Center in
Tianjin and its sustainable plan for Guangzhou’s
city center; and Woods Bagot’s 78-story CBD
Tower Z11 in Beijing.
Energy/Environment
China’s rapid growth has translated into rising
energy demand and massive environmental
costs, with the government under intense pressure
to address growing health problems induced
by poor air quality. The 12th Five-Year Plan aims
to cap coal consumption, promote clean coal and
renewable energy technology, strengthen energy
conservation and building efficiency standards,
and create pilot carbon trading programs. These
measures spell opportunity for Bay Area firms.
Conservation-related exchanges mainly involve
government bodies, research institutions
and non-governmental organizations. The China
Energy Group at Lawrence Berkeley National
Laboratory manages extensive joint energy efficiency
research and technical support projects
with Chinese counterparts and has helped Chinese
steel, cement, refining and textile firms
develop cost-effective operating efficiency standards
and best practices. Energy Foundation
China supports LBNL’s China Energy Group and
has more than 100 partner institutions in China. It
has also advised China’s State Council in drafting
particulate matter emissions standards and supports
sustainable urban design projects in six
cities; the furthest along is in Kunming, where
Berkeley-based Calthorpe Associates is developing
the master plan.
Cleantech
China’s pressing need for renewable energy and
environmental solutions and California’s expertise
in both cleantech and environmental management
(primarily concentrated in the Bay Area) point to
further synergies. Cleantech markets in both the
Bay Area and China are growing, but that has also
brought political complexity.
Major Chinese solar panel makers and systems
providers Trina Solar, Suntech Power and Yingli
Green Energy have established North American
headquarters in the Bay Area. A glut of subsidized
solar panels from China in 2009–10 squeezed U.S.,
Chinese and other manufacturers but benefited
system installers. In 2013, the U.S. government
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Ties That Bind, 2014 Edition
imposed significant antidumping duties and
countervailing duties on Chinese solar imports.
China has also made significant investments in
Bay Area cleantech firms, including Kaistar Lighting’s
$25 million investment in Livermore LED
lighting technology firm Bridgelux, and Hanergy
Holding Group’s $120 million acquisition of MiaSole,
a Santa Clara maker of thin-film solar cells.
Banking/Finance
Foreign-owned banks in China continue to face
headwinds. The most sophisticated global banks
make money but have small shares of an already
thin slice of an otherwise huge market. Wells
Fargo Bank has two branches, in Shanghai and
Beijing. Bank of America’s Asia-Pacific operations
activities, with 27,000 employees, are headquartered
in Hong Kong, with client-serving offices in
Beijing, Guangzhou and Shanghai. Opportunities
are growing to serve mid-market U.S. companies
with operations in China, and Chinese companies
that are expanding internationally. Bank of Tokyo-
Mitsubishi UFJ has been active in China since
1980; its U.S. subsidiary Union Bank leverages
this China presence through its Global Business
Coordination Unit in San Francisco. Silicon Valley
Bank has a strong focus on tech and innovationcentered
companies and has subsidiary offices in
Shanghai and Beijing and a banking license to
handle onshore dollar-based transactions.
Hong Kong and Taiwan banks have a long history
in the Bay Area, and now PRC banks are
making an initial approach. Industrial and Commercial
Bank of China (ICBC) has five Bay Area
retail branches—in San Francisco, Oakland and
South San Francisco—through its 80 percent interest
in Bank of East Asia, a Hong Kong-owned bank
chartered in the U.S. The Bank of Communications
has been approved to open in downtown San
Francisco its second wholesale branch outside
New York.
Mobile/Internet
As the Internet matures, it has become the
nexus where computing and communications
intersect, for consumers and increasingly for
enterprises. China has been quick to embrace
this change, and the Internet in China begins
with the smartphone. In 2013, one in three
smartphones sold in the world were sold
in China.
Oracle serves its top 500 enterprise accounts in
China—mainly large institutions, government
agencies and state-owned enterprises, such as
China Mobile, China Telecom and China Unicom—
through a dedicated sales force and has an R&D
center in Shanghai. Cisco was instrumental in developing
China’s Internet infrastructure and works
with universities and provincial governments to
expand delivery of public services. Intel has production
facilities in Shanghai, Chengdu and Dalian.
Tech companies active in China since the
1980s face challenges from both technological
change and from Chinese competitors. Global
web portal Yahoo! and search firm Google once
enjoyed lead positions in China but were caught
between government surveillance, censorship
policies and competition from indigenous portals.
Yahoo eventually traded its China operations and
$1 billion to Alibaba.com for a 40 percent stake.
Google took down its China site and moved its
servers to Hong Kong in 2010 to offer unfiltered
search via Google.hk. Its Android operating system,
however, is found on most Chinese-made
handsets and enjoys a 90 percent share of the
China mobile phone market.
iPhones are considered a luxury in China and
sell mainly to high-end customers in major cities.
As a result, Apple (served by China Unicom) has
only a 4.2 percent share of China’s mobile phone
market. The September 2013 launch of its less
expensive iPhone5c in partnership with China
Mobile, however, is expected to increase its
market share.
Chinese IT companies are also expanding their
Bay Area footprint in R&D and as service providers.
China’s leading Internet search engine,
Baidu, plans to open the Institute of Deep
Learning (IDL)—its first wholly-owned research
center—in Cupertino. China Mobile and Huawei
both have R&D centers.
Law
China’s admission to the WTO created a market
for investment-related legal services: cross-border
regulatory and tax compliance; the formation of
wholly foreign-owned enterprises (WFOEs);
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Executive Summary
technology licensing; and cross-border M&A
and public listings. M&A and IPO business
stalled during the global downturn. Business is
returning now, but often in different areas: Chinese
bank and SOE (state-owned enterprise)
offshore financing and investments; structuring
of overseas renminbi funds; and cross-border
real estate transactions in both directions. Advisory
work on inbound Chinese investment across
a range of sectors is growing. As case law develops,
intellectual property disputes are fewer
but remain common.
Life Sciences/Health Care
China represents a $300 billion-plus life sciences
market that is growing 15–20 percent annually,
amid challenges of aging, chronic diseases, environmental
illnesses and pandemics. The 12th Five-
Year Plan aims to ensure comprehensive insurance
coverage for over 90 percent of the population;
upgrade the pharmaceutical supply chain; expand
drug coverage, and modernize and expand public
health infrastructure. The Plan also seeks to reduce
reliance on foreign vendors and suppliers.
Bay Area firms are taking advantage of China’s
growing pre-clinical and clinical trial research capacity,
conducting trials at lower cost and in
shorter time frames than in the United States.
Chinese pharmaceutical, biotech and medical
device firms are also looking to the U.S. for partnerships
and M&A that combine cutting-edge
U.S. science with low-cost production to more
deeply penetrate Chinese and global markets.
They are also investing in the Bay Area.
Investment
The environment for foreign direct investment
(FDI) between the U.S. and China is changing at
both ends. Some U.S. investors in China have
taken a defensive posture, favoring greater China
plays—financial services in Hong Kong, and tech
manufacturing in Taiwan—that leverage the
mainland market. Venture and private equity
groups are favoring later stage investments in
companies with proven management and business
models. Fund managers are using the Five-
Year Plan as a roadmap to invest in sectors that
address identified national priorities and enjoy
government support.
The biggest news, however, is the dramatic
growth in outbound investment from China to the
U.S. and other countries. Chinese FDI in the U.S.
has been rising strongly, setting new records
every year since 2009. Some proposed Chinese
investments have failed, primarily due to strategic
or security concerns. In response, a new strategy
may be emerging in favor of deals under $500
million; joint ventures, partnerships and equity
stakes rather than outright acquisitions; a focus
on privately held versus publicly traded firms; and
avoidance of companies that are likely to raise
strategic or security concerns.
Property development in particular is attracting
investment from China. Chinese developer Zarsion,
a private company, has committed $1.5 billion
to a partnership with Signature Development
Group to develop the Brooklyn Basin project on
Oakland’s waterfront. Vanke, China’s largest residential
developer, is partnering with U.S. firm
Tishman Speyer to build two high-rise residential
towers in San Francisco’s South of Market district.
Connectors
New organizations have joined the already-rich
landscape of institutional connectors between
Bay Area and China business.
The Bay Area Council has opened offices in
Shanghai and Hangzhou and will open a third
in Nanjing.
The Governor’s Office of Business and Economic
Development (GoBiz) has opened a California
Office of Trade and Investment in Shanghai, in
partnership with the Bay Area Council.
China SF and China Silicon Valley are working
to bring Chinese investment to San Francisco
and San Jose.
Regional centers are leveraging the federal
EB-5 program to bring investment to projects
such as Hunters Point in San Francisco and call
centers, logistics facilities and nursing homes
in Oakland.
Chinese entrepreneurs and developers have
launched technology and life sciences
incubators to connect start-ups, established
companies and investors for cross-border
collaboration with Chinese counterparts. Early
entrants include InnoSpring, Hanhai Z-Park
and Hanhai-Zibo Life Science Park.
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Ties That Bind, 2014 Edition
Paths Forward
Several specific areas of opportunities emerge
from this analysis.
Education: The Bay Area is a major destination
for students from China, who bring tangible
benefits to the region and its economy. To stay
competitive, and support California students,
continued investment in public higher education
in California is essential. While Bay Area
universities have opened teaching and research
facilities in China, there is also a significant opportunity
for Chinese universities to establish
facilities in the Bay Area.
Tourism will continue to grow as an area
of opportunity.
Immigration: Current policy makes it unnecessarily
difficult for many graduates from China
and other countries to stay and contribute to
the economy. Immigration reform is needed
that removes country quotas for green cards
(which are quickly exhausted for high-volume
countries such as China), makes it easier for
entrepreneurs from China and other countries
to stay in the U.S. to found companies, and
enables foreign graduates of U.S. universities
with advanced degrees in STEM fields to secure
green cards.
Energy and Climate: California and China share
an interest in reducing the consumption of fossil
fuels, increasing the production of renewable
energy, improving energy efficiency, and mitigating
climate change. This presents an opportunity
for the Bay Area, where the state’s
cleantech industry is concentrated and where
government, university and private initiatives
offer a rich basis for dialogue and cooperation.
Investment: As China sends ever-larger volumes
of investment capital abroad, California
and the Bay Area are positioned to capture an
outsized share. Evidence to date suggests that
Chinese investment is bringing positive benefits
through infusions of capital, job creation
and, in some cases by improving access to
Chinese markets.
The EB-5 program is a promising vehicle to
expand Chinese and other foreign investment
and can play an important role in financing
infrastructure, housing and new businesses.
Overseas investors, however, need more
security and transparency. The EB-5 program
(which is currently only a pilot and subject to
extensions) should be made permanent. U.S.
Citizenship and Immigration Services should
also be given the resources it needs to
expedite applications processing (which can
take as long as 18 months), advance priority
projects, and exercise better oversight of
regional centers.
Conclusion
The Bay Area is in a strong position to interpret
China to the U.S., and the U.S. to China, as it continues
to build a positive, multifaceted relationship.
While China will remain a sometimes controversial
topic in Washington, states, regions and
private companies tend to see China more pragmatically.
The Bay Area has shown a particular
affinity and openness to China, and ever since the
historic creation of the Shanghai-San Francisco
Sister City Committee, has reached out to develop
new relationships and channels. New intermediary
entities such as ChinaSF and the Bay
Area Council’s Shanghai and Hangzhou offices
exemplify this trend and provide platforms for
continued business growth.
The wealth of opportunities outlined in this report
does not suggest that China will be an easy
place to do business or that significant barriers
don’t exist. China’s economy is slowing, labor
costs are rising, and competition from Chinese
firms is increasing both in China and overseas.
Cyber security, intellectual property protection,
transparency, and government policies that require
technology transfer or favor national companies
will remain significant issues for both businesses
and policy makers.
Bay Area companies, however, have demonstrated
their capacity to succeed in China’s often
challenging environment, and local government
has chosen to lead as well. As the Economic Institute
found in its 2006 report, as China grows as
a major force in the world economy, the San
Francisco Bay Area continues to occupy the pole
position among its potential U.S. partners. Because
of the scale of this opportunity, the relationship
merits continued investment at both the
public and private sector levels.
xii

1. CHINA’S ECONOMY
Slower, but More Diversified
In any discussion of the Bay Area’s economic ties
with China, it is important to first understand the
macroeconomic, political and market forces
driving China’s economy, including the evolving
role of the Chinese government in key areas of
the economy—from state-owned enterprises to
ownership and local content restrictions applied
to foreign firms and investors; to labor, intellectual
property and environmental regulation; and
to rule of law in commercial contracts.
In 2006
Since its opening to the world in 1978, China had
seen steady, strong economic growth. But with
China’s admission into the World Trade Organization
(WTO) in 2001 came a seven-year explosion
of trade and investment that has arguably
altered the structure of both the Chinese economy
and Chinese society in irreversible ways.
With annual growth of 9–10 percent, China’s
economy doubled during 1999–2005 to $2.2 trillion,
almost overnight becoming the world’s
fourth largest economy. State-owned enterprises
made up only a quarter of the economy by 2005;
old economy industries such as oil, steel and
autos were surpassed by the manufacturing for
export of a wide range products—from consumer
goods and apparel to advanced electronics—and
by new companies based in telecommunications
and Internet services.
Annual foreign direct investment (FDI) into
China grew by nearly 50 percent over 2003–05;
and total cumulative FDI reached $941 billion,
with the U.S. being the fifth largest investor. U.S.
firms across a range of sectors—technology, energy,
home furnishings, sporting goods, electrical
machinery and appliances, autos, apparel—set up
manufacturing joint ventures to produce low-cost
goods for the U.S., using Chinese facilities to save
costs and achieve global manufacturing scale.
Increasingly, those facilities were also positioned
to serve an emerging Chinese middle class.
Technology and life sciences companies established
R&D centers to develop new generations of
products, drawing on a talented labor pool of science,
math and engineering graduates who could
be deployed in large numbers to solve problems.
China’s trade surplus with the world ballooned.
Export growth stimulated the mass migration
of 140 million workers from inland rural
areas to coastal cities. Nearly 100 cities grew in
size to populations exceeding 1 million; the number
of cars in China tripled to 20 million over
2000–05; the highway system grew to 23,000
miles; 37 new international airports were built;
the rapidly expanding ports of Shanghai and
Shenzhen displaced Hong Kong and Singapore
as the world’s leading harbors; Shanghai boasted
4,000 new skyscrapers, with 1,000 more on the
drawing boards.
As it assumed the role of the world’s manufacturer,
China’s demand for raw materials, energy,
and capital equipment increased exponentially. At
the high point of its economic growth, surging
Chinese demand led to global steel, copper and
aluminum shortages and raised oil prices on world
markets. In 2005, the U.S. trade deficit with China
was reached $201 billion; in 2006 China’s foreign
exchange reserves—largely derived from trade—
approached $1 trillion, with 70 percent held in
dollar-denominated securities, mainly U.S. Treasury
certificates.
Growth brought challenges: Chinese export industries
were heavily subsidized, displacing domestic
industries in other countries and leading to
trade disputes; with the “China price” came quality
assurance problems in some sectors; the China
price was rising, as wages and land prices soared;
1

Ties That Bind, 2014 Edition
Beijing did not have the means to enforce intellectual
property (IP) protections nationwide, nor
was it inclined to let IP concerns constrain exports;
in most industries, foreign FDI came with strings
attached, in the form of burdensome technology
transfer and local content rules aimed at supporting
competing domestic brands.
Today
The extent to which China’s fortunes in the previous
decade were tied to foreign manufacturing
investment, exports and consumers in the U.S.
and Europe became readily apparent in the crisis
of 2008–09.
Successive years of double-digit GDP growth
ground to a halt during the global recession of
2008–2009. In mid-2009, People’s Republic of
China (PRC) exports were down 23 percent from
a year earlier, as U.S. and European demand
dried up. China had by that time displaced other
emerging economies as the global manufacturer
of choice, so the impacts of global recession were
immediate and dramatic. China’s economy has
recovered, but not to previous levels.
China GDP Growth, 2002–2012
15%
Percent Growth in GDP
12%
9%
6%
3%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Asian Development Bank; analysis by Bay Area Council Economic Institute
China Exports of Goods and Services as a Percentage of Total GDP, 2002–2012
40%
35%
Percentage of Total GDP
30%
25%
20%
15%
10%
5%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Asian Development Bank; analysis by Bay Area Council Economic Institute
2

China’s Economy
China’s GDP in 2012 was $8.36 trillion. The
government set a 7.5 percent growth target for
2013, which was China’s lowest since 1990. As
China’s economy continues to mature, growth
should remain strong but is not likely to see the
double digit levels of recent decades. The World
Bank forecasts moderate annual growth of 8 percent
through 2015.
A weighted mix of manufacturing and services
in the China Purchasing Managers’ Index (PMI),
prepared by HSBC and consultancy Markit Economics,
validates the trend dating back to 2006.
Annual China Output Growth by Sector, 2002–11 (Percent Change)
Percent Change in Output Growth by Sector
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Industry
Services
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Asian Development Bank; analysis by Bay Area Council Economic Institute
HSBC China Composite Output PMI
60
50 = no change on previous month, S.Adj.
Increasing rate of growth
55
50
45
40
Increasing rate of contraction
2006 2007 2008 2009 2010 2011 2012 2013
Sources: Markit, HSBC
3

Ties That Bind, 2014 Edition
Responding to the global recession, a USD
585 billion stimulus introduced by the Chinese
government in November 2008 included tax
rebates in labor-intensive sectors, increased
bank lending to small businesses, lowered taxes
on home sales, and large-scale financing for jobcreating
infrastructure projects. At the same
time, the government announced multiple interest
rate cuts, and state-owned banks pumped
money into the economy with fresh loans and
easy credit, aided by a record expansion of the
monetary supply. Taken together, these policies
helped insulate China from the more severe effects
felt in Europe and the United States, though
as will be seen below, there have been other
domestic consequences.
For the longer term, Beijing’s drive to sustain
economic growth is apparent in two other sets of
numbers: population and labor force.
China Population Growth, 2006–2012 (Billions)
Population in Billions
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Urban Population Non-Urban Population
43.9% 45.9% 47.0% 48.3% 49.9%
2006 2007 2008 2009 2010
51.3%
2011
52.6%
2012
Source: Asian Development Bank; analysis by Bay Area Council Economic Institute
China Labor Force Growth, 2006–2012 (Millions)
4
2006 2007 2008 2009 2010 2011 2012
Labor Force a 763.2 765.3 770.5 775.1 783.9 785.8 788.9
Employed b 749.8 753.2 755.6 758.3 761.1 764.2 767.0
Agriculture c 319.4 307.3 299.2 288.9 279.3 265.9 257.7
Industry d 188.9 201.9 205.5 210.8 218.4 225.4 232.4
Services e 241.4 244.0 250.9 258.6 263.3 272.8 276.9
Unemployed f 8.5 8.3 8.9 9.2 9.1 9.2 9.2
Source: Asian Development Bank/National Bureau of Statistics
a. Active population aged 16 and over who are capable of working, are participating in, or willing to participate in
economic activities, including the employed and unemployed.
b. Persons engaged in social labor and receiving remuneration payment or earning business income.
c. Primary industry that includes farming, forestry, animal husbandry, and fishery.
d. Secondary industry that includes mining and quarrying, electricity, gas and water, and construction.
e. Tertiary industry that includes hotel and catering services, and other services.
f. Urban areas only.

China’s Economy
First, urbanization is driving growth. Since
1979, China has seen the largest rural migration
to cities in human history. At the end of 2012,
China’s National Bureau of Statistics reported
that 263 million rural residents had migrated to
cities within or outside their provinces—roughly
the equivalent of the U.S. population. China’s
urban population reached nearly 712 million, up
21 million from the previous year, which pushed
the percentage of urban dwellers in 2012 to 52.6
percent of the total population.
This massive shift will continue, with another
200 million Chinese expected to move into cities
by 2025. The economic, social and environmental
implications will be profound—with growth in
incomes, markets, and emissions.
Growth is also shifting from China’s welldeveloped
Tier 1 and coastal cities (such as Beijing,
Shanghai and Guangzhou) to Tier 2 and
Tier 3 cities in the interior. The Economist Intelligence
Unit reports that while growth in the
most developed cities and coastal provinces has
recently been in the 7.2–7.4 percent range, cities
and provinces in central and western China
are growing at double digit rates: 10.1–13.6
percent. This reflects both Chinese government
policy to encourage more balanced growth
between coastal and inland centers and a shift
of manufacturing and other investment to cities
where growth is accelerating and labor is
cheaper and more abundant. This shift of economic
activity inland has been enabled by the
government’s large-scale investment in infrastructure—highways,
rail, ports, river freight
transport systems, and airports—that has helped
attract manufacturing to cities like Chengdu,
Wuhan, Zhengzhou and Chongqing.
Second, as China’s urban population has
grown, its labor force has shifted from agriculture
to industry and services, much of that employment
tied to exports and manufacturing and
serving an emerging urban middle class. The
transition has not been seamless. While the government
has encouraged migration to reduce
rural-urban wealth inequality, it has left in place
the old 1958 hukou household registration system
aimed at regulating rural-urban workforce
mobility. Some 23 million migrant workers with
rural registrations, laid off in 2009 as exports
dried up, were left stranded in coastal cities with
no access to new state-allocated jobs, housing,
social services or education. Many, who had been
trained for specific factory jobs, had no choice
but to return home.
The government has promised gradual
household registration reform beginning in late
2013, allowing rural migrants to establish residency
in smaller cities. One obstacle is that
local governments bear most of the $400 average
cost per year per new resident, yet they
have little taxing authority to generate new
revenue. As a result, cities have been reluctant to
issue registrations.
Aggressive stimulus spending also created issues.
Much of it went to state-owned enterprises
(SOEs) where it could be monitored and distributed
quickly. But SOEs only account for 20 percent
of total employment, so the benefits were dampened.
In addition,
small businesses that accounted for most job
growth could not access credit easily;
stimulus funds were often spent on projects
without receiving adequate review;
bad projects piled long-term debt onto
provincial and local government balance
sheets; and
stimulus channeled into securities and
property, driving development and creating
asset bubbles.
Real estate, which is China’s leading source
of wealth and contributor to demand, is an important
economic bellwether. The Wall Street
Journal reports that at the end of 2012 China
had more than 4 billion square meters of residential
property under construction, enough to
meet estimated demand for four years without
any new construction. As a result, construction
slowed in 2013, impacting global markets for
raw materials such as steel and cement, as many
developers sold down inventory. The government
has attempted to curb speculation—
through taxes on profits from home resales and
higher down payments and mortgage rates for
second home buyers. Cities have also tried to
tamp down speculation with curbs on the presale
of new units. With credit readily available,
however, and homebuyers fearful of rising costs,
housing prices in major cities continue to rise.
5

Ties That Bind, 2014 Edition
Longer-term forces also pose economic
challenges.
China’s labor market is changing. The
workforce, now approaching 800 million, is
growing more slowly each year than in the past
and is forecast to begin declining in 2015, as
China’s one-child policy brings fewer young people
into the labor pool and as workers retire as
early as age 55. An aging population and growing
competition for workers from the service
sector are leading to labor shortages, pushing up
industrial wages.
Rising wages and production costs are
pricing out some low-end manufacturing.
Government investing and bank lending has
increased job opportunities throughout the country,
but skilled, high-productivity workers are
in short supply. Protests over wages and working
conditions at contract manufacturers have
forced change.
The role of unions as employee advocates has
strengthened; a 2008 law requires formal labor
contracts with employees that meet minimum
wage, benefit and workplace standards, although
the minimum wage was frozen in most areas of
the country in 2012 due to the slowing economy.
Private sector wages grew by 14 percent in
2012, according to the National Bureau of Statistics,
reflecting increases of 16.3 percent for rural
workers, 12.5 percent for urban workers and 11.8
percent for migrant workers. While these figures
represented a slowing from 2011, wage growth
has diminished China’s competitiveness as an
offshore manufacturing center, particularly when
compared to lower cost counties such as Vietnam
or Indonesia.
Chinese government sources suggest that as
many as one-third of Chinese manufacturers of
low-end products such as shoes, textiles and
garments have moved all or part of their production
outside China, primarily to Southeast
Asia. While this reflects government policy to encourage
Chinese companies to move upscale to
produce more advanced, higher-value-added products,
it also reflects the reality of rising wages,
thin profit margins, and increased competitive
pressures faced by China’s traditional manufacturing
base. These pressures mirror the forces
that drove the large-scale shift of manufacturing
from Hong Kong and Taiwan to the mainland
decades earlier.
Higher wages + higher prices = higher inflation.
Inflation is a perennial concern. Consumer
and producer prices have been volatile in recent
years, surging in 2007–08; falling off dramatically
as economic activity stalled in 2009; then rising
sharply again until the second half of 2012. For the
whole of 2012, CPI rose just 2.6 percent, compared
to a 2011 year-on-year increase of 5.4 percent.
Higher prices for food, housing, consumer
goods and services have led CPI gains. CPI for
the first half of 2013 grew at an annualized rate of
2.4 percent.
Debt is an issue. Though still considered manageable,
the surge of spending that grew out of
China’s 2008–09 stimulus program has increased
China’s domestic debt-to-GDP ratio (estimated
at 180–200 percent of GDP) and impacted its
credit rating. Banks and local governments that
embarked on large scale spending projects are
particularly burdened.
In 2011, China’s National Audit Office found
that local governments had accumulated debts
of RMB 10.7 trillion, equivalent to 26.5 percent
of GDP. Other estimates, however, run as high
as 60 percent. (The figure in the U.S. is 18 percent).
While the central government probably
has the resources to backstop the debt to prevent
a crisis, concerns are growing about implications
for growth.
The banking sector is also vulnerable. While
the level of non-performing loans at Chinese
banks is officially low—below 1 percent—the
growth of lightly-regulated off-balance-sheet
financing devices (shadow banking through
trusts and other wealth management products)
has raised concerns about China’s financial
transparency and its potential vulnerability to
financial disruptions.
The yuan is up 27 percent since 2005. Until
2005, the yuan had been pegged to the U.S.
dollar at an exchange rate of 8.277. At that point,
China began a “managed float” of its currency
that has since accelerated.
At the end of 2012, the exchange rate had
fallen to 6.230, with an average 2012 exchange
rate of 6.309; at the end of June 2013 the rate
was 6.137.
6

China’s Economy
Exchange Rates: Yuan per U.S. Dollar
2004 2005 2006 2007 2008 2009 2010 2011
End of period 8.277 8.070 7.809 7.305 6.835 6.828 6.623 6.301
Average of period 8.277 8.194 7.973 7.608 6.949 6.831 6.770 6.461
Source: Asian Development Bank
Measured on an internal real exchange rate
(IRER) basis that also tracks prices of goods and
services that cannot be imported or exported, the
rate has risen by 35 percent. Before the managed
float was allowed, early estimates were that the
yuan had been undervalued under the peg by as
much as 40 percent, but with its recent depreciation
it does not appear wildly out of alignment.
In political terms, the exchange rate poses an
ongoing challenge for both China and its trading
partners, which have accused China of keeping
the yuan artificially undervalued to effectively
subsidize exports. With exports slowing, China
has an interest in keeping the yuan undervalued
and interest rates low, to encourage investment
in infrastructure and property development and
support employment in construction. But the
strategy also discourages consumption and favors
saving by eroding purchasing power.
Is the economy rebalancing? The savings, in
turn, have often been misallocated by the biggest,
least efficient borrowers—public projects
designed to bolster cities and provinces’ prestige.
SOEs alone account for 35 percent of
China’s total business investment; local government
debt equals 20 percent of China’s GDP.
Rating agency Fitch reports that lending expanded
over 2008–10 from 122 percent of GDP to
171 percent. China’s impressive savings rate, at 52
percent in 2011, provides a helpful cushion for
Chinese banks, and the government’s large foreign
reserves provide added security against serious
financial disruption. But recent trends highlight the
difficulty of rebalancing the economy toward reduced
reliance on exports and fixed investment
and increased reliance on consumption.
The 12th Five-Year Plan
In March 2011, the National People’s Congress
and the Communist Party of China (CPC) formally
adopted China’s 12th Five-Year Plan. The Plan
provides a broad strategy for addressing the
problems described above and taking China’s
economy forward through 2015.
The Five-Year Plan begins by identifying 10
factors that threaten continued development of
the economy:
resource constraints, particularly in energy and
raw materials
a mismatch in investment and imbalance
in consumption
income disparity
weak capacity for domestic innovation
a production structure too heavily weighted
toward heavy industry relative to services
an inadequate and declining agriculture sector
lack of coordination between urban and
rural development
an imbalanced employment system
worsening “social contradictions” leading
to unrest
persistent obstacles to scientific development
that are difficult to remove
In response, it sets a series of targets to be
completed during the 2011–15 period:
Economy
a 7 percent average annual GDP growth
at least 45 million jobs to be created in urban
areas, with a 4 percent increase in the urbanization
rate to 51.5 percent of the population
service sector value-added output to increase
from 43 percent to 47 percent of GDP; coastal
regions to transition from traditional manufacturing
to hubs for R&D, advanced manufacturing
and services
research and development spending in seven
target sectors—energy efficiency and
environmental protection; next generation
information technology; biotechnology;
advanced equipment manufacturing; new
energy; new materials; and new-energy
vehicles—to account for at least 2.2 percent
7

Ties That Bind, 2014 Edition
of GDP; value-added output of emerging
strategic industries to account for 8 percent of
GDP by 2015 (up from 3 percent in 2010)
transformation of the economy from an export
focus to a balance of exports, imports
and domestic consumption; from a reliance
on foreign technology to domestic innovation;
and from traditional to low-carbon/new
materials industries
Environment/Energy
a 30 percent cut in water consumption
a 16 percent cut in energy consumption per
unit of GDP, and a 17 percent cut in carbon
dioxide emissions
non-fossil fuel use to increase to 11.4 percent
of primary energy consumption, with hydropower
to account for more than half of that
total by 2020
reforestation projects aimed at increasing both
forest coverage and stocks
Agriculture
minimum grain production of 540 million
tons annually
Investment Reform
agriculture, high-tech and environmental protection
sectors opened to foreign investment
qualified enterprises to be encouraged to
list on stock markets; reform monopoly industries
to achieve easier market entry and
increased competition
Livelihood
population to be capped at 1.39 billion; oneyear
increase in average per capita life span
36 million apartments for low-income families
to be constructed or renovated
per capita income to be increased to $10,000
by 2020; 13 percent average annual increases
in the minimum wage through 2015
pension plans to be extended for all rural
residents and 357 million urban residents;
publicly-funded healthcare services to be
expanded to ensure basic coverage
China’s government faces conflicting pressures
as it attempts to restrain runaway credit,
but at the risk of further dampening a slowing
economy. The rebalancing of China’s economy
away from its historic focus in fixed investment
and export dependence, and toward increased
domestic consumption, has been identified by
Chinese leaders as critical to future growth and
stability. For that to occur, more financial resources
will need to be directed away from infrastructure
and state-owned enterprises and
toward consumers and private enterprises. Increased
consumption will require continued
wage growth, which will be hard to sustain without
increased productivity. This is one factor
behind government policies to accelerate indigenous
innovation.
Change doesn’t come easily, however, even
with the government’s extensive policy tools. In
2012, the share of fixed investment in China’s
GDP rose to 46.1 percent from 45.6 percent in
2011; at the same time, the share accounted for
by household consumption was flat at 35.7 percent,
as reported in The Wall Street Journal. In
the first half of 2013, household consumption’s
contribution to GDP growth fell significantly
compared to the same period in 2012, while
investment’s contribution to GDP growth rose—
suggesting a continued trend. At this writing,
China appears to be sustaining growth using
traditional levers. The shift to greater consumerled
growth is still a strong bet but is likely to
take years.
As China’s economy continues to mature, the
days of double-digit annual growth are unlikely to
return. But while it faces significant near and longterm
challenges, China continues to present a
large and growing market, and with that, important
opportunities for economic exchanges in fields
where Bay Area companies, institutions, entrepreneurs
and investors excel—agriculture, life sciences,
clean energy technology, environmental
protection, cloud computing and 4G mobile Internet,
and entrepreneurship to name only a few.
8

2. THE BAY AREA CHINESE COMMUNITY
Beginnings
The first Chinese immigrants in California were
two men and a woman, arriving on the brigantine
Eagle on February 2, 1848, and brought over as
servants for the family of C. V. Gillespie, a San
Francisco merchant and importer from China.
The following year, merchant ships calling at
Canton brought news of gold discovered in California.
Overpopulation and famine in China after
the Taiping Rebellion prompted families to send
young men abroad to earn money. Most of the
arrivals were from rural areas in the Pearl River
Delta of Guangdong Province: of the estimated
47,000 Chinese immigrants on the West Coast in
1860, fewer than 600 were women. Shipowners
promoting Gam Saan, “Gold Mountain,” as a
land of opportunity were eager to attract passengers
traveling “steerage” in cramped quarters
below decks. The voyage to San Francisco took
45 days and cost $55.
Many Chinese immigrants traveled to the U.S.
under labor contracts with merchants in China or
with American middlemen who solicited them
and arranged their passage. They worked as servants,
cooks and waiters, and in laundries and
cigar or shoe factories. But contracts often
proved unenforceable and many laborers ended
up mining or prospecting on their own in the
Sierra foothills.
In later years, Chinese laborers made up most
of the workforce laying track for the San Jose
Railroad, the California Central Railroad from
Sacramento to Marysville, and the transcontinental
California Pacific Railroad from Sacramento
to Promontory Point, Utah. They also were instrumental
in constructing levees in the Sacramento
River Delta area that later enabled the
large scale development of agriculture in the
Sacramento Valley.
Chinese Communities
Take Shape
As early as 1849, Chinese merchants in San Francisco
formed a gongsi, or association, to mediate
disputes within the Chinese community, facilitate
commercial dealings with outside interests, and
participate in civic events. From 1851–54, six benevolent
associations were formed representing
immigrants from particular districts within Guangdong
Province. These associations offered aid with
the immigration process, housing and local customs.
They lent money, helped start businesses
and represented Chinese interests in countering
discrimination. Churches with missionary ties to
China taught English to parents and children.
Family associations were established (including
protective societies known as tongs), along with a
separate benevolent society to arrange medical
care and lend money for return to China or to arrange
burial of remains in China for the elderly. In
1862, a kung saw, or neutral public association,
was formed to settle disputes among associations.
Out of this business and commercial network, the
Chinese Six Companies were formed in 1882.
From the 1850s on, the Bay Area Chinese
community was a significant contributor to local
economies. The dozen or so square blocks that
formed San Francisco’s Chinatown spread out
from the Long Wharf that linked the financial district
and northern waterfront, with its restaurants,
residential hotels and small factories. In the
1870s, Chinese fishermen came to dominate the
shrimping industry, with more than 20 camps
along the section of southeast San Francisco waterfront
now known as Hunter’s Point, and on the
San Rafael estuary that is still called China Camp.
9

Ties That Bind, 2014 Edition
This illustration, showing customs officers inspecting belongings of Chinese immigrants as others enter
the room from a ship, appeared on the Feb. 3, 1877 cover of Harpers Weekly, entitled “Chinese
Immigrants at the San Francisco Custom-House.”
In 1870, 24 percent of Chinese immigrants in
the U.S. resided in the Bay Area; by 1900 that
percentage had nearly doubled to 45 percent.
Chinatowns became fixtures in San Francisco,
Oakland, San Jose, Sacramento and Stockton. In
the East Bay, Chinese laborers worked in factories
and on dam projects and sold fruit and vegetables
in Oakland’s five Chinatowns.
During this time, discrimination against Chinese
immigrants—centering mainly on jobs—was an
unfortunate reality. Calls for tougher enforcement
of labor contracts, a head tax on foreign miners
and outright immigration curbs were all beaten
back, but each time by smaller margins. Economic
depression in the 1870s, speculative investing and
drought cost many Californians both fortunes and
jobs, providing a tipping point that turned an 1877
San Francisco labor solidarity rally into three nights
of anti-Chinese rioting.
Congress subsequently passed the 1882 Immigration
Act, also known as the Chinese Exclusion
Act, barring U.S. entry for Chinese laborers entirely,
and allowing in merchants, their servants and
families, diplomats, travelers, teachers and students,
but prohibiting them from obtaining citizenship.
The Act remained in effect until 1943.
The 1906 Earthquake
Chinatown was among the areas of San Francisco
totally destroyed during the earthquake and fire of
April 18, 1906. The earthquake proved both a
blessing and a curse, producing a more permanent
and resilient Chinese community and offering a
10

The Bay Area Chinese Community
way around the Chinese Exclusion Act. Denied any
form of government relief, thousands of Chinese
fled the city in the aftermath of the earthquake.
Most came to Oakland, where Lew Hing, himself a
refugee from the quake, opened the two city
blocks of his Pacific Coast Canning Co. to the new
arrivals. He provided food, tents and medical attention
to those in need. Later, to help finance the
rebuilding of San Francisco’s Chinatown community,
he partnered with merchant Look Tin-eli to
establish the Bank of Canton in 1907. A year later,
it was the principal bank for 100,000 overseas Chinese
in the U.S. and Mexico.
Lew Hing, Look Tin-eli, the Six Companies and
various family associations were instrumental in
Chinatown’s reconstruction. Heading off efforts
by City Hall to condemn and raze Chinatown after
a false bubonic plague scare, Look brokered construction
of pagoda-style replacement buildings,
by Irish contractors and workers, that helped
make the city-within-a-city a permanent landmark.
One benefit for Chinese immigrants arising
from the 1906 earthquake was the destruction of
most San Francisco citizenship and residency records.
Prior to 1906, the Chinese Exclusion Act had
restricted travel between China and the U.S. to
specific exempt classes of immigrants, primarily
merchants and families of citizens. After, the West
Coast saw a spike in immigration applications from
young men known as “paper sons,” most claiming
to be children of citizens.
Two-Way Trade Grows
Steel, oil and textile producers formed the
American-Asiatic Association in New York in the
1890s, lobbying President McKinley to enforce an
“open door” China trade policy. Their target was
a vast China market of as many as 400 million
people, where European and Japanese competitors
were trying to establish exclusive trade
concessions and port leases.
Some 30 percent of U.S. imports from China
and 17 percent of U.S. exports to China moved
through the Port of San Francisco in 1898. Northern
California exported large volumes of agricultural
products and lumber to China, and Northern
California companies introduced milled flour and
kerosene heating oil to the Chinese market.
Bay Area exports to China grew from $2.6 million
in 1894 to $8.7 million in 1906, according to
Chamber of Commerce reports. The San Francisco
Chamber of Commerce lobbied the McKinley administration
to make it easier for Chinese merchants
to enter the United States. San Francisco
shipping and lumber magnate Robert Dollar led
the first business delegation to China in 1910 at
the urging of the Chinese Chamber of Commerce,
“to create and increase the friendly feeling between
China and the United States, and to increase
our commerce.”
The Immigration Profile
Changes
Bay Area Chinatowns flourished in the decades
that followed, home to thousands of small businesses
with their own newspapers, telephone
exchanges, banks, theaters and opera houses.
Angel Island Immigration Station, on San Francisco
Bay, served from 1910–40 as the country’s
principal entry point for Chinese immigrants. Despite
practices subjecting applicants to aggressive
interrogations, medical examinations, separation of
families and detention averaging two to three
weeks but in some cases as long as two years, over
175,000 Chinese immigrants were processed before
the eventual repeal of the Exclusion Act.
A 1965 overhaul of U.S. immigration policy,
fueled in part by Cold War tensions, began to
reshape the Bay Area Chinese community in important
ways.
The Immigration and Naturalization Act of
1965 eliminated the previous Eurocentric country
quota system, and permitted more skilled
workers and family members from around the
world to enter the U.S. At the same time, a flood
of some 5 million Chinese refugees displaced by
the Cultural Revolution had crossed into then-
British Hong Kong, which had no way to absorb
them. Across the Taiwan Strait, conflicts routinely
flared between Beijing and the Kuomintang
(KMT) government of General Chiang Kaishek—which
maintained its claim to be the
rightful government-in-exile of all China. The
KMT, in a constant state of siege at that time,
had become autocratic and its economy had
11

Ties That Bind, 2014 Edition
stalled. While Bay Area Chinatowns were mostly
made up of Cantonese-speaking rural immigrants
from Southern China, there was also a
KMT affinity dating back to the early 1900s.
Many Chinese immigrants had returned home
after the 1906 earthquake, seeking work opportunities
and relief from persecution, during
the relatively peaceful, prosperous KMT rule of
Dr. Sun Yat-sen.
In the 10 years following passage of the Immigration
and Naturalization Act, the Chinese community
in the U.S. nearly doubled. Many skilled
business owners and professionals left Hong Kong.
Young Taiwanese arrived initially as students,
sent to eventually establish a business foothold in
the United States. Family-owned companies typically
dispatched their eldest sons to learn about
new technologies and processes. They were often
set up in homes, on a path to a green card, as
an insurance policy in case political instability
forced the family to pull up roots in future.
Hong Kong arrivals set up traditional businesses,
such as restaurants and laundries, but they
also assimilated to a greater degree than preceding
generations, buying property, becoming doctors
and lawyers, opening insurance offices and
accounting practices, and working for Bay Area
companies. Taiwanese students gravitated toward
science, engineering, mathematics and business.
None of these new immigrants fit well into
the established Chinatowns that were designed
as insular communities of tiny apartments built
for unskilled workers with no families. The new
arrivals, over time fluent in English, moved out
into the residential neighborhoods of San Francisco,
Oakland, San Jose and beyond, joining
and adding to the cultural fabric of the wider
Bay Area community.
12

3. CHINESE STUDENTS AT BAY AREA UNIVERSITIES
Land of Opportunity
Chinese students have made a critical contribution
to technology innovation and economic growth in
the Bay Area over the past three decades.
Since the late 1980s, the best and brightest
students emerging from mainland China’s technical
universities with undergraduate degrees in
science, technology, engineering and mathematics
(STEM) fields have gone abroad to complete
their education, with the U.S. and California
among their top destinations. Before them, a
wave of Taiwanese science and engineering
students arrived in the early days of personal
computing and networks, as Taiwan was building
its reputation as a leading global original
equipment manufacturer.
Chinese and Indian graduates formed much
of the talent pool for Silicon Valley innovation
throughout the 1990s, moving from basic computing
and networks to the Internet, mobile
communication and social media.
Graduates in STEM fields have become an integral
part of an emerging cross-border innovation
Exchanging Students
ecosystem, launching start-ups, redeploying
wealth as angel investors, widening access to the
China market, and giving back through endowments
and participation in alumni networks.
But changing demographics in China are beginning
to alter the mix of students arriving in the
region, with significant implications for the new
arrivals, the institutions they attend, and the Bay
Area’s innovation ecosystem.
Numbers Tell the Story
An emerging urban Chinese middle class with
rising household incomes, property ownership
and a near 50 percent savings rate has enabled
families from Tier 2 and Tier 3 cities in China’s
interior, and from rural areas, to self-fund their
children’s study abroad—an opportunity further
aided by China’s one-child policy. It is a trend
that has both increased the number and altered
the mix of students arriving in California and the
Bay Area.
Number of Students
250,000
200,000
150,000
100,000
U.S. students at PRC schools
PRC students at U.S. schools
Note: U.S. figure for 2012–2013 not available
50,000
0
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
Source: Institute of International Education
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Ties That Bind, 2014 Edition
The number of students from greater China at
U.S. colleges and universities grew from about
95,600 in 2004–05 to more than 225,300 in 2011–
12. By contrast, U.S. students studying abroad in
greater China grew during that time from about
7,300 to more than 17,100; with most studying
over a summer or semester, not in a degree program.
The People’s Republic of China (PRC) sent
no students to the U.S. until 1974. By 1988 it was
the leading country of origin for foreign students
and has held the number one or two position
since. In the 2004–05 academic year, the PRC
sent 62,523 students to the U.S., according to the
Institute of International Education (IIE). By 2012–
13, the number had more than tripled to 235,597.
Numbers of Taiwanese students in the U.S.
peaked in 1993–94 at about 37,500; they fell
from just under 26,000 in 2004–05, to just over
23,000 in 2011–12. Hong Kong students peaked
in 1992–93 at just over 14,000, leading up to the
1997 handover of the British territory to China. By
2004–05, Hong Kong enrollments had dropped
by half to just over 7,100 and in 2011–12 they
stood at about 8,000.
IIE reported 75,000 international students in
California for AY 2004–05, with a combined 18
percent, or 13,600 students, from greater China. In
2012–13, over 111,000 foreign students enrolled in
the state, with 28.7 percent from mainland China,
4.6 percent from Taiwan and a smaller share, perhaps
2–3 percent, from Hong Kong. This suggests
that about a third of total foreign students in California—almost
37,000—are from greater China.
A survey of leading Northern California academic
institutions by the Bay Area Council Economic
Institute in 2006 indicated that more than
5,500 graduate and undergraduate students
from mainland China, Taiwan and Hong Kong
were enrolled at Bay Area colleges and universities
during AY 2004–05. Those students contributed
an estimated $149 million annually to the
state and regional economies in tuition, living
expenses and discretionary spending.
Updated figures developed by the Economic
Institute, in combination with IIE data, suggest
that the number of students from greater China
enrolled in Bay Area colleges and universities
grew to some 7,000 in 2011–12. Using IIE’s
formula for per-student expenditures in that year,
those students contributed some $218.9 million
to the state and regional economies.
Leading fields of study by Chinese students
have remained fairly constant over time: business
and management; engineering; mathematics
and computer science; economics; and
physical and life sciences. Since the global
downturn, however, emphasis has gradually
shifted from STEM fields to business and economics,
particularly among undergraduates.
A variety of factors—the bursting of the tech
sector bubble in 2000–01, post-9/11 visa restrictions,
reduced foreign travel due to the SARS and
avian flu scares, and recruitment competition
from U.K., Canadian and Australian universities—
contributed to a slowing in Chinese student enrollment
from 2002–05. But those numbers have
expanded each year since then; the number of
PRC students has tripled.
The mix of students by academic level is significant:
a fairly constant 54 percent of Taiwanese
students apply at the graduate level, while 70
percent of Hong Kong students have been undergraduates.
But while PRC undergraduate and
graduate students have both grown in absolute
numbers, IIE data reveal a dramatic shift: undergraduates
as a share of total PRC students have
grown from 31 percent to 38 percent since 2010,
while the graduate share has declined from 52
percent to less than 46 percent.
Graduate schools nonetheless continue to see
significant Chinese student enrollment. Annual
surveys of schools nationwide by the Council of
Graduate Schools show PRC applications up by
an annual average of 20 percent over 2010–12,
with the highest percentage growth in applications
at schools in the western U.S.
Education as an Investment
The U.S., and California in particular, are a draw
for Chinese students. Higher education is viewed
as key to career opportunities for the country’s
burgeoning middle class. In the past 10 years,
Chinese universities and polytechnic schools have
seen growing enrollment, today turning out some
8 million graduates annually. But rapid expansion
14

Chinese Students at Bay Area Universities
of the system has led to uneven quality. Classes
often focus on lectures and rote learning, with
little interaction between student and professor
or collaborative learning among students.
Middle-class families aspiring to greater educational
opportunities for their children are often
at a disadvantage in the competition for spaces
at better schools at home; most high schools are
boarding schools that charge for tuition, books,
exams and added tutoring. English proficiency is
required for the national exams that decide university
acceptance and English teachers are in
short supply. Parents often lack the education
needed to help children with their studies. Ironically,
children scoring lower on the national exams
are typically channeled into lower-quality,
three-year polytechnic schools that can cost up to
twice the tuition and fees of elite schools because
they receive less in government subsidies.
This creates a perverse set of incentives for
families. Facing a more costly, less competitive
outcome for a son or daughter at home, Chinese
families from all walks of life are saving, borrowing
or selling assets to send children to school
abroad. Here the Bay Area enjoys a number of
advantages—shorter travel time, fewer time
zones, one of the largest Chinese communities
outside of China, world-class universities and an
educational focus on critical thinking, and collaboration
and innovation that extends into an
entrepreneurial business culture. The 2013 Academic
Ranking of World Universities, conducted
by Shanghai Jiao Tong University, places Stanford
and Berkeley as number two and three out
of 500 institutions rated, strengthening the appeal
of the region for families seeking prestigious
institutions.
Rising tuition costs at California schools have
not, so far, put them at a serious disadvantage
in the competition for students; a weaker dollar
has helped offset rising costs, and although financial
aid is less available, it is estimated that
fewer than 10 percent of international students
receive scholarships.
Chinese Students at UC Berkeley, 2006-11 (by Place of Origin)
1,100
1,000
900
800
Hong Kong
Taiwan
PRC
Number of Students
700
600
500
400
300
200
100
0
2006 2007 2008 2009 2010 2011
Source: U.C. Berkeley; analysis by Bay Area Council Economic Institute
15

Ties That Bind, 2014 Edition
Chinese Students at UC Berkeley, 2006-11 (Undergraduates and Graduates)
900
800
700
Undergraduate
Graduate
Number of Students
600
500
400
300
200
100
0
2006 2007 2008 2009 2010 2011
Source: U.C. Berkeley; analysis by Bay Area Council Economic Institute
Chinese Students at UC Berkeley, 2006-11 (Percent Share of Total Intl. Students)
Share of International Students
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Hong Kong
Taiwan
PRC
2006 2007 2008 2009 2010 2011
Source: U.C. Berkeley; analysis by Bay Area Council Economic Institute
Student Trends
A survey of Bay Area universities mirrors the
Chinese student enrollment trends reflected in
national figures:
Taiwan and Hong Kong students have
remained relatively constant in number and
share of the student population since 2006,
while enrollments from the PRC have
increased steadily.
PRC undergraduate enrollment is up sharply
relative to graduate applicants.
A growing share of those undergraduates comes
from Tier 2 and Tier 3 inland cities in China.
16

Chinese Students at Bay Area Universities
Chinese Students and Scholars at Stanford University
Number of Students/Scholars
800
700
600
500
400
300
200
Undergraduate
Graduate
Non-Matriculated Students
Post-doctoral Scholars on J Visas*
100
0
2005–06
2008–09
2011–12
Source: Stanford University
*Includes post-doctoral students, research associates, faculty and staff on H visas(135 as of January 1, 2012).
Principal areas of study have diversified
beyond the STEM fields, primarily into
business and economics.
UC Berkeley data shows that the overall number
of students enrolled from greater China has
grown in every year but 2007, from 567 in that
year to 1,301 in 2011. The numbers of Taiwan
and Hong Kong students have increased modestly
from relatively small bases.
At Stanford University, the numbers have been
different, with continued emphasis on graduate
and post-doctoral students, primarily in the scientific
and engineering fields.
UC Davis, with its emphasis on agriculture,
medicine (including veterinary medicine) and engineering,
has been a strong draw for Chinese
students, as China grapples with feeding and
providing adequate healthcare for its people.
More than 20 percent of the 2,481 international
graduate students entering Davis in 2011—
555 students—were from greater China. About
30 percent (or 160) of those students were enrolled
in the College of Agricultural and Environmental
Sciences. Another 109 studied medicine,
105 studied engineering and nearly 60 others
studied biology and veterinary medicine. Davis
also enrolled 150 undergraduates from China,
either as freshmen or as transfers—double the
number enrolled in 2010.
In all, nearly 800 Chinese students attended
UC Davis in 2011—about 560 from the PRC, 121
from Hong Kong and 101 from Taiwan. The 225
enrolled Chinese undergraduates each pay nonresident
tuition of $38,000 annually, according to
a report in the Sacramento Bee; add in living expenses,
insurance, healthcare and other costs,
and the total can reach $54,000. The number of
undergraduates at Davis has increased ten-fold
since 2007. By contrast, Peking University costs
the equivalent of $950 per year; even at prestigious
Chinese universities the quality of education
is not considered as good as it is in better U.S.
schools—classes are large and consist mostly of
lectures, with grades heavily dependent on final
exams and little opportunity for student collaboration
or interaction with professors.
For 2012, San Francisco State University
(SFSU) reports 1,542 degree-seeking international
students from 90 countries. Of those, 670
are from greater China—560 from the PRC, 58
from Taiwan and 52 from Hong Kong. While the
numbers of Taiwan and Hong Kong students
have fallen modestly but steadily from 2003, the
numbers of PRC students have steadily increased.
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Ties That Bind, 2014 Edition
It should be noted that the Chinese student
profile at SFSU is different from other schools; it
is made up primarily of children of immigrants
and is overwhelmingly undergraduate. Thus, the
relative changes in the SFSU Chinese student
population may have more to do with the
changing demographics of the previous generation
of arrivals and their families than with new
students coming directly from China.
This fast-growing undergraduate cohort extends
throughout Bay Area campuses, with
important implications.
Schools such as Stanford, Berkeley, UCSF and
Davis have strong specializations that attract
graduates pursuing advanced degrees, and they
have seen their student profiles remain relatively
constant. For example, Stanford accepts international
undergraduates, but the numbers are
small; most students from China are still graduate-level
and heavily concentrated in the science,
technology, engineering and mathematics fields.
It is at institutions like the University of San
Francisco (USF) that the demographic changes
can be seen in sharpest contrast, reflecting trends
at smaller private and public universities throughout
the U.S.
USF, a Jesuit university, draws on the religious
order’s long history and deep connections in
China dating back to the 16th century when Jesuit
priests served as scientific advisors to the Imperial
Court and ran the Imperial observatory.
Jesuit schools, libraries, observatories and
churches can be found throughout China today,
particularly in and around Shanghai.
Those connections, plus USF’s location in San
Francisco and the reputation of its School of
Management and Business, have attracted applicants
from China in large numbers. According to
USF managing director of China programs and
professor of management Stanley Kwong, of the
781 Chinese students now attending USF, some
600 are undergraduates. Nearly all of these undergraduates
are business majors. Many are from
Tier 2 and Tier 3 inland cities and provinces like
Qinhai, Yunnan, Chongqing or Anhui. They are
not elite graduates, but the children of an
emerging middle class whose parents have put a
premium on a quality education abroad that they
hope will either result in a better job back home
or enable them to run the family business.
The competition for international undergraduate
students has also created market opportunities
for new players. In 2010 and 2011, for example,
the for-profit Academy of Art University in
San Francisco made the Institute of International
Education (IIE) Top 5 list of academic institutions
accepting international students in California,
with more than 4,400 foreign students enrolled in
2012, all in the Bay Area. IIE does not break
down state totals by country of origin, but applying
the combined statewide share of students
from the PRC and Taiwan, 26.8 percent, it is reasonable
to extrapolate that as many as 1,000
Chinese students—many of them children of immigrants,
as in the case of the CSU system—may
attend the Academy’s various campuses.
Unintended Consequences
International students make an increasingly important
contribution to cash-strapped university
budgets nationwide, paying tuition rates that are
typically twice the in-state level or more. Students
from China are especially welcome since the vast
majority are self-funded and do not request financial
aid. But for students under intense pressure
to succeed, the rigors of higher education, in
a foreign country and a second language, are
taking a toll.
Many newly-admitted Chinese undergraduates
at USF are not as English-proficient as they should
be. Most are pushed by family to pursue a business
degree but lack the verbal and comprehension
skills to follow the lectures and required
reading or collaborate on student projects.
Screening overseas applications is difficult, and a
cottage industry of “placement agencies” in China
charges families $5,000 or more to fill out applications,
write essays and in some cases forge transcripts
and recommendation letters. Most students
cannot afford a preliminary trip to the U.S. for orientation
and arrive days before classes begin; they
do not know what to expect and schools are unable
to do needs assessment.
Many of these students are under intense financial
pressure; often parents have sold property
and/or cashed out savings to send them abroad.
18

Chinese Students at Bay Area Universities
On tight budgets, with inadequate language and
social skills to navigate a foreign culture, many of
these students rarely leave their dormitories. Without
proper counseling or language support, a
growing number fall behind and even drop out.
At USF, international students pay annual tuition
of $36,000 plus living expenses. The university
“conditionally” admitted a number of Chinese
students with weak English language skills, to the
point that they initially needed translation headsets
for their orientation. They have had difficulty
keeping up in their courses and collaborating with
other students. In response, the university has
been in talks with California State University officials
to partner on English-language course programs
for USF Chinese undergraduates, in return
helping CSU market its less well-known Bay Area
campuses in Asia.
Since the trend is relatively new, no concrete
statistics on student success rates will likely be
available before 2015. Stanley Kwong estimates
that 15–20 percent of the students he sees will
complete college in five years, given the extra
time spent attaining language proficiency. Another
5 percent will complete their four-year programs
in less time by taking on more than a full
load of classes. About 80 percent of USF Chinese
master’s graduates return to China; most undergraduates
stay on for graduate school.
At UC Berkeley, a public university, International
Office director Ivor Emmanuel says successive
years of budget cuts have reduced state
funding to only 11 percent of Berkeley’s budget.
As a partial response, the university has raised its
admission target for non-resident students to 20
percent, half from out of state and half from outside
the U.S. International students currently
make up about 9 percent of the student body.
A rising flood of undergraduate applications
from China caught Berkeley off-guard; most Chinese
undergraduates apply as economics or
business majors—subject areas heavily dependent
on language skills—Emmanuel says. Entering
freshmen often are not able to make a separate
trip from China for orientation and so are at a
disadvantage when selecting and signing up for
classes. Once in class, they may have trouble
following lectures and discussions.
Precise numbers are not readily available for
the numbers of foreign undergraduates who
do not complete four-year programs (Korean
students have faced similar difficulties);
anecdotally the numbers are small but growing.
Emmanuel believes the answer over time
will entail expanded counseling services and
parallel English instruction throughout the school
year, but ramping up such programs has been
a challenge.
A larger issue—especially for a public university—involves
the broader demographic student
body makeup, as higher-paying out-of-state and
international students fill more admissions slots
relative to in-state students.
What happens after a student graduates has
particularly important economic impacts. A July
2013 article in The Economist cites estimates
from the China Western Returned Scholars Association
that, of some 2.6 million Chinese students
going abroad to complete their studies since
1978, some 1.1 million have returned to China—
suggesting that 1.5 million have not.
Many students who have chosen to remain in
the Bay Area have become successful technologists,
entrepreneurs and investors, magnifying
their contribution to the economy. Those that
return to China bring a Bay Area/Silicon Valley
perspective and often serve as two-way bridges,
developing products and operating companies in
both countries. For returnees, the transition may
not always be easy. Recent “sea turtles” are
finding a bleaker picture in China. Slower economic
growth has curtailed hiring, and returnees
face longer waits to land lower-paying positions.
As a distinct, uniquely Chinese Internet emerges,
tech entrepreneurs with Silicon Valley backgrounds
can find themselves out of step with indigenous
technology, applications and customer
tastes and have difficulty managing local engineers
and programmers.
Also, an overseas degree may no longer carry
the same cachet with Chinese employers, as top
students from leading universities are snapped up
by global employers while students with less aptitude
or questionable degrees find employment
prospects weaker.
19

Ties That Bind, 2014 Edition
“Sticky” Students
Why are such trends important? The absolute
numbers and growth rates for international students
applying to Bay Area universities, the levels
at which they apply and the subjects they pursue
are determinants in whether and how long they
stay on after graduating—to work, start new businesses,
form households and make a lasting contribution
to the regional economy.
In a 1999 report, “Silicon Valley’s New Immigrant
Entrepreneurs,” AnnaLee Saxenian, dean of
UC Berkeley’s School of Information Management
Systems (SIMS), found that more than 2,000
Silicon Valley technology firms had been
launched by Chinese entrepreneurs, many of
them graduates of Bay Area universities. Those
companies accounted for $13.2 billion in annual
sales and nearly 42,000 jobs—17 percent of the
Valley’s high-tech economy at its peak.
In a 2007 update to that study, “America’s
Immigrant Entrepreneurs,” Saxenian and colleague
Vivek Wadhwa, Pratt School of Engineering
executive-in-residence at Duke University,
further noted that
of approximately 28,000 technology and engineering
firms launched during 1995–2005 nationwide,
more than 6,000 were established in
California;
52 percent of the Silicon Valley technology
and engineering firms launched during 1995–
2005 had at least one foreign-born key founder,
compared with 39 percent for California
as a whole and 25 percent nationwide;
in 2005, 33 percent of the tech population in
Silicon Valley was foreign-born;
96 percent of the Indian, mainland Chinese
and Taiwanese founders interviewed nationwide
held bachelor’s degrees, and 74 percent
held graduate and post-graduate degrees,
mainly in engineering, computer science and
information technology, applied sciences and
mathematics;
half of Chinese founders, and 55 percent of
Taiwanese founders, had graduated from four
elite schools in the PRC and two on Taiwan;
PRC government initiatives to expand university
enrollment have put stress on the higher
education system, and the uneven quality of
education has led more undergraduates to
pursue study abroad;
just over half of immigrant founders from all
countries received their highest degrees from
universities in the U.S., a list that included
large and small, public and private institutions;
of the immigrant founders surveyed, 52 percent
initially came to the U.S. to study;
43 percent came as the result of a job opportunity;
only 1.6 percent came with the intent to
start a business.
In a June 2012 report by the New York-based
Fiscal Policy Institute, analysis of 2010 U.S. Census
Bureau data revealed that immigrant business
start-ups have grown by 50 percent over 1996–
2011—from 12 percent to 18 percent of total
small businesses in the U.S.—and that Chinese
immigrants alone account for more than 34,000
small businesses nationwide, nearly 5,000 of
those in STEM-related fields.
In his 2012 book, The Immigrant Exodus, Wadwha
suggests that the flow of immigrant entrepreneurs
to the U.S. and Silicon Valley may have
peaked, as foreign graduates with advanced degrees
return home or are lured by incentives other
countries offer. Wadwha contacted a sampling of
2,042 companies nationwide and found that the
proportion of immigrant-founded companies had
slipped from 52.4 percent five years earlier to 24.3
percent. Among the 335 companies surveyed in
Silicon Valley, the share was 43.9 percent.
Immigration policy and recession have both
played a role in the decline. Wadwha’s overarching
point is that as other countries join the competition
for highly-skilled global talent, including graduates
with advanced degrees from U.S. institutions, the
U.S.—and by implication, Silicon Valley—cannot
afford to take for granted its current leadership
role in fostering global entrepreneurship:
Australia has an annual cap of 126,000 visas
for skilled immigrants and their families—
comparable to the 140,000 limit in the U.S—
for a country with a population 10 percent the
size of the U.S.; regional governments can
award preferences in special skill categories;
qualified international students can remain in
the country for 18 months after graduating,
compared to 12 months for the U.S.
20

Chinese Students at Bay Area Universities
Canada evaluates green card applicants
based on age, education, work experience
and other factors using a points system; undergraduate
and graduate degree holders can
get work permits to stay in Canada for up to
three years without first having a job; PhDs in
STEM fields can begin the application process
for permanent residency while still in school;
entrepreneurs with viable business plans can
obtain visas, even without prior funding.
China’s National Medium- and Long-Term
Talent Development Plan offers returning
graduates and entrepreneurs educated overseas
generous cash bonuses, free or subsidized
housing and multi-year exemptions from
business taxes.
Singapore offers skilled immigrants an Employment
Pass that allows them to work and later
apply for permanent residency; spouses are allowed
to work; under the EntrePass program,
an immigrant with a government-approved
business plan and $50,000 in outside investment
is granted a one-year pass to start a business,
with visa renewals and even government
matching funds in certain fields if the business
is initially successful.
While the lure of an overseas degree may be
diminishing as a determinant of job and income
prospects in China, affluent families of elite STEM
students still see benefits to an overseas degree,
and to the pursuit of opportunities abroad. An
October 2012 New York Times article highlighted
a growing trend of professionals emigrating from
China, citing Organization for Economic Cooperation
and Development (OECD) data that 508,000
Chinese nationals moved to the 34 OECD countries
in 2010—up 45 percent from 2000.
In 2012, U.S. Department of Homeland Security
figures show more than 81,000 Chinese nationals
establishing permanent residence in the U.S.—
easing from 87,000 in 2011 but up from 73,000 in
2010. China’s share of new permanent residents
over 2010–12 has increased steadily from 7 percent
to 8.2 percent. The reasons include quality of
life concerns among a rising middle class and affluent
population about overcrowded cities, air
quality, food safety, education and healthcare;
political concerns about corruption, a lack of transparency
and prospects for upward mobility; and
complaints that small and mid-sized private
businesses are disadvantaged relative to stateowned
enterprises.
A growing number of wealthy Chinese families
are exploring the option of an EB-5 investor visa
(see “The EB-5 Advantage” in the Connectors
chapter), under which a minimum $5 million
investment in a job creating venture—either
directly or through a government-approved
regional center investment entity—can lead to a
conditional visa in two years and permanent
residence in five years, for as many as 10,000
investors annually. A provision in the law allows
qualified EB-5 investors to enroll their children in
college at in-state tuition rates.
Even many less well-off Chinese are willing to
gamble on a new life overseas, working as taxi
drivers, farmers, and fishermen or in restaurants.
China’s Ministry of Commerce reports that some
800,000 Chinese nationals work abroad; extended
families pool funds to send a son or daughter to
school as a first step toward emigration.
Significantly, leading Bay Area schools such as
Stanford, Berkeley or UCSF report that 90 percent
of graduates with advanced degrees stay in
the U.S., often in the Bay Area and California;
among Chinese students overall, the share who
stay on drops to an estimated 60 percent.
Over the last decade, immigrant workers
from mainland China have grown as a percentage
of the Bay Area’s foreign-born workforce,
especially in science, technology, engineering
and math (STEM) occupations. Between 2000
and 2011, Chinese immigrants increased from 8
percent to 10 percent as a share of foreign-born
workforce. In STEM occupations, Chinese workers
increased from 8 percent to 13 percent of
the foreign-born STEM workforce, adding an
additional 7,053 workers.
STEM talent from Taiwan and Hong Kong,
while still substantial, has declined in absolute
terms and as a share of total foreign-born workers.
There were 3,633 fewer Hong Kong-born
STEM workers in the Bay Area in 2011 than in
2000, falling from 4.6 percent to 3.4 percent of
total foreign-born STEM talent. While the total
number of Taiwanese workers grew by 3,724 in
the region over this period, there were 2,422
fewer STEM workers in 2011 than in 2000.
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Ties That Bind, 2014 Edition
Chinese Immigrant Workers in the Bay Area
Percent of Foreign-Born Workers
14%
12%
10%
8%
6%
4%
2%
PRC
% of all foreign-born workers
% of foreign STEM Workforce
Hong Kong
Taiwan
0%
2000 2007 2011 2000 2007 2011 2000 2007 2011
Source: American Community Survey, 3-Year Estimate; analysis by Bay Area Council Economic Institute
Cross-Border Academic
Collaboration Runs Deep
Over more than three decades, Bay Area universities
have developed and strengthened relationships
with Chinese academic institutions, and with
government and businesses, through joint research
and other collaborations.
Stanford and the UC Berkeley, Davis and San
Francisco campuses in particular have assisted
China in areas of law, finance, corporate governance,
architecture and planning, alternative energy,
environmental mitigation, healthcare and
agriculture. Earlier initiatives are detailed in our
2006 report.
More recently, despite economic volatility and
fluctuations in U.S.-China political relations, these
academic connections have quietly, consistently
continued their work. The following are a few
key examples:
The Stanford Law School China Guiding Cases
Project deploys a team of 60 legal scholars in
China, Hong Kong and the U.S. to translate Supreme
People’s Court of China “guiding cases”
that are intended to establish legal precedents
in civil, criminal and administrative law.
The Stanford Program on Regions of Innovation
and Entrepreneurship (SPRIE) has partnered with
Taiwan’s Industrial Technology Research Institute
(ITRI) since 2004 on clean technology and green
cities innovation, through annual conferences,
shared research and joint programs.
The Berkeley-Tsinghua University Program for
Advanced Study in Psychology, funded in part
by HTC co-founder Cher Wang and VIA Technologies
CEO Wen Chi Chen, is coordinating
global research to address the rise in reported
factory suicides and violent crime in China.
Berkeley’s Department of City and Regional
Planning (DCRP) has teamed with scholars
from Shanghai’s Tongji University to develop
transportation and environmental solutions to
meet the needs of residents in outlying areas
of Shanghai.
UC Davis and BGI-Shenzhen, a non-profit research
arm of the Beijing Genomics Institute,
formed the BGI@UC Davis Partnership in 2011
to undertake joint genomic research relating to
food security, human and animal health and
wellness, biodiversity and environmental health.
The China Center for Energy and Transportation
(C-CET), a partnership of researchers and
advisors from the UC Davis Institute of Transportation
Studies, Tsinghua and Tongji Universities,
Ford Motor Co., the World Bank, the
Energy Foundation and Lawrence Berkeley
22

Chinese Students at Bay Area Universities
National Laboratory, is researching advanced
vehicle energy systems and future rural and
urban vehicle designs.
Peking University Center for Theoretical Biology
researchers are at UCSF doing systems
biology research to understand biological
processes and engineer treatments at the
molecular level, under a fellows program
funded by Chinese industrialist Li Ka-Shing’s Li
Foundation.
UCSF’s AIDS Research Center has partnered
with the Chinese Center for Disease Control to
address shortages of HIV/AIDS researchers
and clinical investigators in China.
In an effort to extend their reach to students,
scholars and alumni in China without the need to
travel on a visa, Stanford and Berkeley have each
opened China-based facilities.
Stanford’s history with Peking University (PKU)
dates back to the 1970s, when the two schools
launched an exchange between their language
programs as Stanford first began accepting Chinese
graduate students. In 2004, Stanford began
offering study abroad and internship programs in
collaboration with PKU.
The Stanford Center at Peking University
(SCPKU), completed in March 2012, is a 36,000-
square-foot, $7 million facility available to Stanford
students, researchers and faculty working in
China. Principal funding came from the family
foundation of Chinese investor and alumnus
Chien Lee. The Center provides an extension of
the university, supporting its own scholars and
programs—the Asian Liver Center, the Rural Education
Action Project, the Center for Sustainable
Development & Global Competitiveness, and the
schools of business and engineering, among others—and
a venue for hosting conferences and
research collaborations in China.
Berkeley signed an agreement in November
2011 to establish a center for its School of Engineering
in the Zhangjiang High-Tech Park outside
Shanghai. The 50,000-square-foot building
opened in November 2013, with a primary focus
on university and industrial research collaboration
and is seen as a first step toward creating a
full-scale academic center. It is being provided
to the university rent-free for five years by the
government-supported park, with additional
funding from corporations. Haas School of Business
and the Boalt Hall School of Law are exploring
similar arrangements.
A rich platform for even deeper academic collaborations
is provided by alumni giving and networks.
UC Berkeley in particular enjoys a large,
well-placed network of alumni in China. The
process works both ways, as Tsinghua, one of
China’s leading universities, has 10,000 alumni in
the Bay Area—more than anywhere in the world
outside Beijing.
Endowments
The virtuous cycle of immigrant Chinese entrepreneurship
is readily visible in university endowments
from successful entrepreneurs and
investors who made their fortunes in Silicon Valley
and throughout the Bay Area, as well as from
prominent Chinese alumni and family members.
Donations range from major health research
centers and libraries, to endowed chairs and
fellowship programs for visiting scholars in specific
fields, to individual scholarships fostering
student exchanges.
Reported endowments from Chinese donors
to UC Berkeley and Stanford alone in the past
two decades total more than $150 million.
Among the largest are the $40 million Tan Kah
Lee Hall, a chemical engineering research laboratory,
and the $40 million Li Ka-Shing Center for
Biomedical and Health Sciences, at Berkeley; the
$30 million-plus Li Ka-Shing Foundation donation
to Stanford’s School of Medicine; and the $6.4
million from Taiwan alumni to fund the Kwoh-Ting
Li professorships in engineering, economic development,
medicine and Chinese culture.
More recent gifts include $30 million from
NVIDIA Corporation founder and CEO Jen-Hsun
Huang, to help build Stanford’s 130,000-squarefoot
Jen-Hsun Huang School of Engineering
Center, and a $2 million Li Ka-Shing gift to fund
“precision medicine” research—merging genome
research and molecular biology with big data
analytical tools toward more personalized
predictive clinical care—at UCSF.
23

Ties That Bind, 2014 Edition
Visas: The School-to-Work Transition
The link between international students and U.S. immigration policy is
a crucial one for the Bay Area. Foreign students typically enter the
U.S. on F-1 visas; visiting exchange scholars, professors and researchers
enter the U.S. on J-1 visas.
F-1 students must be enrolled full time at institutions approved by
the U.S. Citizen and Immigration Services (USCIS), and they must be
proficient in English, financially self-sufficient and have a permanent
residence abroad. J-1 applicants must additionally provide documented
evidence of specific academic proficiency or accomplishment.
J-1 visas are for a set term; holders must return to their home countries
within 30 days of expiration for a minimum of two years before
then reapplying for a new visa to re-enter the U.S. to work.
Remaining in the U.S. to work in STEM fields typically involves an
H-1B visa for persons of special skills and abilities. U.S. visa regulations
allow students holding F-1 visas to transition to H-1B work visas by
earning work credit during their time at university and immediately
upon graduating.
The USCIS imposes an annual cap of 65,000 on the issuance of
H-1B visas. An additional 20,000 visas are exempted from the cap and
reserved for applicants holding advanced degrees from U.S. academic
institutions. Another 6,800 slots are set aside outside the cap for new
“H1B1” applicants under recently signed Free Trade Agreements with
Singapore and Chile.
Employers at universities, non-profit research facilities and government
offices and facilities may apply for H-1B visas on behalf of employees
year-round and are exempt from the cap. Also exempt are
new visas issued to those already holding H-1Bs, to extend their stays
in the U.S. or to reflect a change in job status. As a result, more than
117,000 H-1B visas were issued in FY 2010–11; more than 129,000
were issued in FY 2011–12.
After a full academic year in school, F-1 students can undertake
Curricular Practical Training (CPT), an internship with an outside employer
in their fields of study, during the summer or part time. After
graduating at either the bachelor’s or master’s degree level, students
can remain under university sponsorship for 12 months and
take jobs, known as Optional Practical Training (OPT), related to
their fields of study.
Since 2008, qualified STEM students have been eligible for a further
extension of OPT for up to 17 months with an employer registered under
the USCIS E-Verify program, the Internet-based system that allows
businesses to determine employees’ eligibility to work in the U.S.
Visiting scholars holding J-1 visas do not have access to equivalent
options to CPT or OPT; limited extensions and waivers are possible,
but at the discretion of USCIS, and they are difficult to obtain.
Another immigration option for prospective students is the EB-5 investor
visa, created by Congress in 1990. It makes up to 10,000 visa
slots available to foreign nationals investing a minimum $500,000 to
24

Chinese Students at Bay Area Universities
$1 million in job-creating business ventures over a five-year period once
job-creation requirements for the investment are fulfilled. Children of investors
in the U.S. under age 21 during the five-year period are eligible
to enroll in college or university at in-state tuition rates. (For more detail,
see “The EB-5 Advantage” in the Connectors chapter.)
The current annual limit of 140,000 green cards has produced a
five-year backlog of applicants; for priority workers, advanced degree
holders and persons of exceptional ability from China, the wait is 1–3
years; for the skilled workers category, it is 5 years or more.
For H-1B visas, an application period opens each April 1, for the
coming fiscal year. In periods of peak demand, the quota has been
filled in as little two days, as it was in 2007 for the 2008 fiscal year. For
2011 it took 10 months; for 2012 the cap was reached in November
2011; and for 2013, the quota was filled by mid-June 2012. The fiscal
year 2014 H-1B visa quota was closed on April 5, five days after the
application period opened, by which time the USCIS had received
124,000; the quota was filled by computer lottery.
Congress has grappled for more than two years with a range of
proposals to reform the U.S. immigration system, including changes to
the H-1B and EB-5 programs. The Senate passed S. 744, the Border
Security, Economic Opportunity and Immigration Modernization Act,
in June 2013.
Among its provisions, S. 744 eliminates country-specific limits for
employment-based visas but leaves the overall worldwide cap at
140,000; exempts STEM graduates and their families from the worldwide
cap, raises the special allocation for master’s and doctoral degree
holders to 25,000 and allows spouses in the U.S. to work; permits
foreign graduates with PhDs and/or STEM graduates with master’s or
doctoral degrees to apply directly for green cards; exempts STEM
graduates and J-1 visiting scholars from the visa labor certification
process; increases the H-1B visa allocation to a range of 110,000–
180,000 each year, depending on demand; raises the H-1B allocation
for advanced degree holders to 25,000; reserves unused EB-5 visas for
qualifying entrepreneurs launching start-ups in the U.S.; and permits
F-1 student visa holders to enter the U.S. with “dual intent” to study
and to immigrate.
As of this writing, the House of Representatives is taking up immigration
reform in a series of bills rather than a single one, and it is
divided as to whether it will offer them as companion legislation in a
joint conference to pass a single bill for signing.
In June 2013, the House Judiciary Committee passed the Supplying
Knowledge Based Immigrants and Lifting Levels of STEM Visas Act
(H.R. 2131), known as the SKILLS Visa Act. The bill would reallocate
55,000 visa slots currently reserved under diversity and family reunification
programs to increase the number of H-1B visas, offer green
cards to advanced-degree STEM graduates, establish a new entrepreneur
visa, strengthen the investor visa program and repeal the country-specific
cap for employment-based visas.
25

Ties That Bind, 2014 Edition
26

4. PROFESSIONAL NETWORKS/ASSOCIATIONS
Staying Connected
Chinese immigrant networks in the Bay Area date
back to the Chinatown family benevolent associations
of the 1800s. Modern professional networking
organizations developed beginning in
1980 with the Asian Business League (ABL) in San
Francisco and the Asian American Manufacturers
Association (now the Asia America MultiTechnology
Association or AAMA) in Silicon Valley. ABL
was comprised of Asian small business owners
and professionals in law, finance, real estate and
other fields. AAMA’s membership included technology
professionals in the semiconductor, computing
and network fields.
These associations had common objectives:
networking opportunities, a sense of community,
and shared support in navigating a business
environment that at times involved discrimination
and a glass ceiling in hiring and promotions.
Their growing schedules of annual dinners,
monthly meetings with speakers, award programs
and weekend trips provided opportunities
to share ideas, make valuable business connections
and socialize.
AAMA’s early focus was tech, and its founders
were mainly Taiwanese, primarily in chip, PC and
network systems manufacturing, reflecting Taiwan’s
emergence as a hardware OEM. As tech
broadened during the 1980s into software,
graphics and the beginnings of the Internet, and
as mainland Chinese students began to arrive in
Silicon Valley in the late 1980s, a new crop of
smaller, industry-specific associations emerged
for professionals in semiconductors, networking,
storage, wireless, optoelectronics and other
fields. And as venture capital (VC) spurred entrepreneurs
to launch new companies, associations
adapted their structure and activities. Traditional
lunch and dinner meetings gave way to pitch
sessions, mentorship programs and discussions
about management strategy and IPOs.
Strategic competition between Taiwan and
a rapidly developing PRC gave birth to two
associations, the Monte Jade Science and Technology
Association, a Taiwan-centric organization
formed in 1989 with seed funding from the
Taiwanese government, and the Hua Yuan Science
and Technology Association (HYSTA), a
similar PRC government-supported group
launched in 1999. Both were tied to science and
technology parks—Hsinchu in Taiwan and
Huayen in Shenzhen—which included incubators
that offered tech start-ups offices, lab space,
funding and contacts to domestic companies.
The goal was to entice the best and brightest
tech graduates back home, rather than lose
them to Silicon Valley.
By the mid-1990s, these groups had contributed
to a cross-fertilization that gave rise to “astronauts,”
scientists and engineers in constant
transit back and forth across the Pacific, innovating
and forming companies, and to “sea turtles,”
young graduates striking out on their own with
new start-up ideas, often launched in Asia and
funded in California. Transnational “innovation
clusters” formed, with entrepreneurs leveraging
the comparative advantages of Silicon Valley,
Taiwan and China to pursue R&D, execute designs
and test concepts, and manufacture finished
products for market.
AAMA, Monte Jade and HYSTA grew quickly
in size and influence, institutionalizing the network
model for sharing information, making business
connections, funding start-ups, and mentoring
entrepreneurs on corporate leadership and
governance. Each had more than 1,000 individual
members and some 200–300 corporate members
from tech fields and offering support services in
finance, banking, law and consulting.
Annual meetings attracted as many as 1,500
attendees and hosted CEOs from major tech
27

Ties That Bind, 2014 Edition
companies in Silicon Valley, Taiwan and China, as
well as government leaders and rising entrepreneurial
stars discussing disruptive new advances.
AAMA launched a VC/entrepreneur program and
opened Beijing and Shanghai chapters; Monte
Jade opened 12 U.S. chapters and organized an
executive mentorship program and an annual
tech study tour to Asia; HYSTA opened a Beijing
chapter, expanded ties to multiple science and
technology parks in China, and formed a venture
capital group and an emerging leaders forum.
The three major Silicon Valley groups as well
as the smaller associations were catalysts for innovation.
They provided Chinese engineers, programmers
and entrepreneurs with venues to
meet, share ideas, develop concepts for new
businesses and products, access capital, find
mentors and strike out on their own.
Today AAMA, Monte Jade and HYSTA remain
the dominant Silicon Valley organizations dedicated
to fostering cross-border tech business
formation and growth with greater China. Most of
the industry-specific organizations remain active
to varying degrees, the largest and most prominent
of these being the Chinese American Semiconductor
Professional Association (CASPA).
AAMA and Monte Jade have Bay Area membership
numbers that have remained fairly constant
over time, reporting 1,100 and 1,200 members,
respectively, on their web sites; HYSTA, meanwhile,
claims a Bay Area membership of 8,000, up
from 6,000 in early 2011 and 2,000 as of 2006.
New economic forces have recently converged
to re-shape the focus and influence of professional
networks:
China’s relative economic resilience early in
the 2008–09 downturn attracted continued
investment and growing numbers of returning
Chinese entrepreneurs.
PRC-Taiwan political tensions have eased,
resulting in expanded cross-Strait trade
and investment.
Semiconductor, PC, server and other costs
have dropped and more innovation is now
being done in the cloud on open-source
platforms, making incubator facilities less
important to start-ups.
More options are available to entrepreneurs
to access the China market and engage in
cross-border collaboration, through alumni,
company, investor and other contacts outside
traditional associations.
A 2010–11 controversy over accounting and
valuation discrepancies in “reverse merger”
public listings of Chinese companies (merging
them into a dormant, already public shell
company to expedite the listing process)
dampened cross-border M&A activity and
narrowed VC exit options.
Traditional associations have struggled to
maintain relevance amid an explosion of new
consumer-based technologies in areas such
as mobile, cloud and social media.
Each of these changes has challenged the role
of traditional associations. Associations have responded
by broadening their programming and
membership development into new industries
and geographic markets, opening offices in
China, Taiwan, Singapore and Korea, and partnering
with businesses and government to host
networking events on both sides of the Pacific.
They have maintained ties to government-funded
programs and incubator facilities, but more as a
value-added service to members than as a central
purpose. In addition to business formation alone,
new program emphasis has been placed on more
customized mentorship and on cultivating nextgeneration
leaders.
Core activities remain largely the same: large,
themed annual events attracting senior-level tech
professionals and highlighting growth trends;
mentorship initiatives to help young entrepreneurs;
targeted networking events, including formal
pitch contests where start-ups present new
business ideas to prospective investors; and
hosting of regular cross-border trips offering introductions
to business and government leaders.
HYSTA executive director Leslie Yuan says interest
in his group and in the China market grew
steadily throughout the global recession, as
domestic U.S. markets dried up and China remained
a relative bright spot. An annual trip to
China has been expanded to three times a year;
for the 2012 trip there were 100 applicants for a
maximum 25 slots. The 2012 annual conference
in Santa Clara, “China and Technology’s Impact
on the Global Economy,” featuring Baidu cofounder
and CEO Robin Li and Microsoft Online
28

Professional Networks/Associations
Services President Dr. Qi Lu, drew more than
1,000 attendees.
Yuan, a former Hewlett-Packard executive, says
the relationships among organizations today are
less competitive and more a question of serving
different customer niches toward the same end;
today there is a greater sense of a single overseas
Chinese—or even pan-Asian—network focused on
exploring potential business opportunities through
many points of contact.
A big difference for entrepreneurs today,
Yuan acknowledges, is that the cost of launching
a tech start-up has fallen dramatically. “Chips,
PCs, phones and network equipment have come
down in price; more software is open source or
cloud based,” he says. “Advances that used to
take months or years and cost millions of dollars
now take weeks, if not days, and cost thousands.”
Talent, he adds, can be accessed globally,
on a 24/7 basis; China’s consumer market is
poised to pass Japan’s in the near future at
current growth rates, and more Chinese national
champions like Lenovo, Huawei, ZTE and Haier
are venturing abroad, so there is less need to
lure entrepreneurs back home to the science
parks after university.
With a new wave of Chinese investment already
beginning to enter California, looking for
exactly the kind of setup, management, compliance
and other expertise HYSTA members can
now offer in the reverse direction, Yuen says
“we’re going to see more billion-dollar deals
coming, and we would be selling ourselves short
if we focused only on tech.”
AAMA has also diversified, both geographically
and in terms of member industry sectors. Replacing
the word “Manufacturers” with “MultiTechnology”
in its name signaled a broadening of its
scope beyond chips, PCs and peripherals. The
group now has members and puts on programs in
the full range of tech fields including cloud, big
data, gaming and social media, as well as techreliant
verticals such as automotive and healthcare.
AAMA executive director Charlene Yu Vaughn
notes that while three of the group’s Asian chapters
are in China, its interests extend throughout
Asia to India, Singapore and Japan, and it has
opened a Seoul chapter in cooperation with the
Korea Trade-Investment Promotion Agency.
Like Yuan, Vaughn credits the U.S. downturn
with spurring activity for her organization, as businesses
here sought out new markets and as immigrant
entrepreneurs saw more opportunity back
home. In both cases, cross-border networks were
important. She agrees that historic lines separating
professional organizations, alumni chapters, tech
incubators and other entrepreneurial channels are
blurring: “My whole philosophy is that it should be
a collaboration more than a competition,” she
says. “Chinese students may come to the U.S. for
their education and return to China if they see
greater opportunity, or work here for a couple of
years, gain experience and go home; many have
opened offices here and in China as well. Entrepreneurs
will go where the opportunities are.”
As the flow of Chinese investment into the
U.S. increases, Vaughn agrees that AAMA and
other groups can serve an important function as a
bridge in both directions, linking China with what
is unique in Silicon Valley and the Bay Area: “In
China you don’t see corporate management or
entrepreneurism based on sharing information;
it’s not part of the culture. And you can’t just
transplant the VCs, lawyers, professors, and
schools and have another Silicon Valley; it’s a very
special place in the world.”
As the major associations broaden their missions,
and as their memberships become more
diverse, new organizations are stepping in to fulfill
their earlier national objectives.
The Chinese Enterprise Association (CEA)
of Northern California, formed in 1997 as a social
networking organization to help successive
waves of Chinese STEM students and entrepreneurs
in Silicon Valley adjust to unfamiliar ways
of life and business customs, has more recently
evolved into an association of Chinese companies
headquartered in China but with a presence
in Silicon Valley.
“A couple of years ago the Chinese government
saw more companies going abroad and
decided to recognize us as an official organization
and provide more direct support to help
organize events and build bridges with local
associations and with government,” says CEA
Northern California chapter president Ben Chen,
who is also west region operations president for
China Unicom Americas.
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Ties That Bind, 2014 Edition
Chen sees CEA’s benefits flowing in both directions,
introducing member firms to Bay Area business
and government leaders, but also making
them accessible to prospective local partners,
vendors and suppliers. CEA’s more than 80 members
include the major Chinese telecom service
providers and solar companies; mobile handset
and networking firms Huawei Technologies and
ZTE Corp.; Internet firms Tencent, Alibaba and
Sina; PC manufacturer Lenovo; Chinese banks and
credit card processor China UnionPay; Air China;
and People’s Daily.
Along similar lines, the Silicon Valley Taiwanese
American Industrial Technology Association
(TAITA-SV) began with Taiwan government
support in 2003. TAITA-SV is Taiwan-specific and
represents a more tightly-coordinated effort in
support of the cross-border ecosystem of Taiwan
tech industries, government-funded science parks
and overseas Taiwanese entrepreneurs. Its stated
mission is to
facilitate technological exchanges between
Silicon Valley and Taiwan,
foster Silicon Valley entrepreneurs and
U.S. businesses to explore crossborder
opportunities,
promote U.S.-Taiwan industrial, scientific
and technological talent exchanges, and
help Taiwan industries expand their
reach in global markets and raise their
international profiles.
Sponsoring members include ITRI, TECO’s
science and technology division, and the Taiwan
Trade Center and Hsinchu Science Park, plus
modem and router manufacturer Actiontec,
network server firm Supermicro, Chunghwa
Telecom unit CHT Global, and Innobridge
Capital Management, a Santa Clara early-stage
investor in Taiwanese and Silicon Valley hardware
start-ups.
And it was only a matter of time before a truly
global, partly virtual professional network appeared
on the scene. The Beijing-based Great
Wall Club (GWC) is a for-profit networking group
for mobile Internet professionals, with a U.S.
branch in Mountain View, as well as branches in
Japan, Singapore, Taiwan and Finland.
In addition to monthly meetings, study trips and
networking events organized in China, GWC hosts
dual annual Global Mobile Internet Conferences
(GMICs) in Beijing and Silicon Valley. The 2012
Silicon Valley event, held at Moscone Convention
Center in San Francisco, drew 5,400 attendees and
170 exhibitors from 58 countries. Exhibits included
a dedicated room for mobile app developers to
demonstrate their latest creations. HYSTA and
AAMA have been GMIC co-sponsors.
As larger established groups broaden their missions
and scope of activities to accommodate industry
changes, few new groups have surfaced in
the past decade and many that did have not
lasted. One group that has seen expansion is the
Silicon Valley-China Wireless Technology Association,
formed in 2000. SVC Wireless membership
is younger and caters to start-ups and venture
and angel investors offering early-stage capital
(from the Bay Area and China) and incubators.
Its 2013 annual conference, “Mobile Pivots Future
of Computing,” emphasized the technology
paradigm shift from PC to mobile and beyond; the
symbiosis between Silicon Valley and China in the
mobile revolution; and cross-border opportunities
for entrepreneurs. In addition to discussions on
wearable technology, mobile healthcare, connected
cars, big data and patent filing in China, a
Showcase pitch session brought together entrepreneurs
and investors.
The group also sponsors an annual Silicon
Valley Youth Innovation Award to deserving high
school students. SVC Wireless claims 5,000
members and 30 alliance partners. Among its
sponsors are IBM, Marvell Technologies, Microsoft,
China Unicom and Weibo.
The rise of new incubator and accelerator facilities
throughout the Bay Area—some of the largest
with close ties to China—is augmenting but also
providing an alternative to established associations.
These new office park and industrial site developments
offer start-ups lab, office and meeting
space; technology and business mentorship; seed
funding; and connections to next-stage capital,
production capacity and prospective business
partners on both sides of the Pacific. (See the Investment
section for more information.)
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Professional Networks/Associations
The Asia Foundation:
Supporting Development and Reform
Under the current Five-Year Plan, China faces a tipping point in
its development.
In four key policy areas—law and governance, the environment,
opportunities for women and the poor, and disaster management—the
San Francisco-based Asia Foundation is on the ground in China helping
to address challenges and contribute to reform. The Foundation also
supports programs that encourage constructive U.S.-China relations.
“We’re trying to understand the very complex currents we see in
China’s society, economy and government, and the extent to which
they’re coming together to create policy change,” says Foundation
vice president Gordon Hein. “It’s a top-down process, but partly it’s
also bottom up, in terms of citizens’ demands and expectations; that’s
the space in which we operate.”
The Foundation has been active in China since 1979, beginning
with a fellowship program with China’s Ministry of Foreign Affairs.
Since 1980, over 90 emerging leaders from the Ministry have taken
part in the fellowship program, earning master’s degrees in international
relations from themost prestigious universities in the U.S.
A major focus is on increasing citizen participation in lawmaking
and policy and improving the transparency and accessibility of public
information. Toward that end, The Asia Foundation has worked with
Peking University, the Administrative Law Research Association, local
law schools and government legislative affairs offices to support administrative
law reforms in a number of provinces and cities and to
offer legal consultations through walk-in clinics, hotlines and community
visits. The Foundation also supports study tours in the U.S. for
Chinese academics and government officials to better understand
open government processes.
Pilot projects have increased public involvement in budget reform
in Heilongjiang Province, management and disbursement of poverty
alleviation funds in Nigxia Autonomous Region, local people’s congresses
and legal counseling to handle citizen complaints in six provinces,
and training and education to increase public participation in
local development in Anhui Province.
The Foundation has collaborated with the Ministry of Civil Affairs, the
Chinese Academy of Governance, Chengdu Education Foundation,
Sichuan University and others on disaster management programs—
including on leadership and interagency coordination, communitybased
mitigation initiatives, earthquake recovery/housing rehabilitation
and risk reduction in schools.
To support the government’s efforts to balance rapid growth with
environmental protection and sustainability, the Foundation works to
build local environmental protection capacity and to encourage policy
and technological innovations through increased dialogue and communication
among stakeholders. The Foundation’s programs in China
have trained officials from municipal environmental protection bureaus
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Ties That Bind, 2014 Edition
(EPBs), judges from people’s courts and representatives from environmental
organizations, on the use of alternative dispute resolution
for the increasing number of conflicts over environmental pollution.
Other programs support work in southern China to better engage
small and medium-sized enterprises in low carbon economy planning
at the city level.
Partnering with research institutes, local EPBs, civil society organizations
and business associations, the Foundation is also helping to
implement milestone directives on environmental information transparency
and public participation in environmental decision-making.
In four diverse pilot cities, the Foundation and its partners are working
to foster constructive collaboration among government, civil society
and business. Drawing on the Foundation’s extensive work to
strengthen good governance in China, the project aims to develop
and test practical mechanisms by which the public can access information
about local pollution or make their voices heard in decisions
about local environmental issues.
“The way China initiates reforms is through experimentation at the
provincial and local levels,” Hein explains. “Everything is tested at
lower levels and then expanded, so that the process is centralized
enough that they can make decisions and implement them, but decentralized
enough that they can experiment.”
Other groups with deep connections to greater
China and the Bay Area Chinese professional
community also have significant educational and
policy orientations.
The California-Asia Business Council (Cal-
Asia) was formed in the early 1990s as the California-Southeast
Asia Business Council, and in
2000 extended its focus on industry sector trends
and economic policy to include China. It has
hosted senior-level briefings from government
and business leaders, visiting Asian delegations
and—partnering with other local organizations—
business-focused China programs on legal reform,
banking, online gaming, Hong Kong’s film
industry and Tianjin city planning.
The Hong Kong Association of Northern
California, founded in 1984, provides a focal
point for businesses and individuals interested in
business and trade with Hong Kong. Its activities
include social events, business forums, trade missions,
and meetings with Hong Kong officials.
A nationwide group of Chinese-American
business, arts and community leaders (architect
I.M. Pei and cellist Yo-Yo Ma are among the
founders), the Committee of 100 was formed in
1990 to foster positive U.S.-China relations
through communication and exchanges and to
enhance the image, visibility and participation of
Chinese Americans within the U.S. It has commissioned
nationwide surveys on American perceptions
and attitudes regarding China, lobbied policymakers
on cross-border trade and commercial
issues, pushed to expand classroom teaching
about Asian-Americans and Asian history and culture,
and in 2005 launched a national mentorship
program for university students and young adults.
A senior-level, policy-focused organization,
the 1990 Institute was formed by Unison Group
Chairman C. B. Sung, along with former U.S.
Undersecretary of State Philip Habib, Federal
Reserve Bank of San Francisco president Robert
Parry, UC Berkeley Institute of East Asian Studies
director Robert Scalapino and others. Established
to provide independent policy-based research in
the U.S., focusing on economic and social development
and China’s modernization, the Institute
has sponsored studies and conferences and promoted
exchanges of research scholars in the U.S.
and China.
The Dui Hua Foundation was founded in
1999 by former Occidental Chemical Co. executive
and American Chamber of Commerce-Hong
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Professional Networks/Associations
Kong president John Kamm. Dui Hua (meaning
“dialogue” in Chinese) works with government
officials in Washington, embassies and consulates
in China, foreign governments, human
rights and other non-governmental organizations
to keep international attention focused on
specific political prisoners and secure their release.
In 2004, Kamm, credited with the release
of more than 400 political and religious prisoners
in China, received the MacArthur Foundation
prize for his work. In 2005, Dui Hua was granted
special consultative status by the Economic and
Social Council of the United Nations.
Founded in New York in 1956 by John D.
Rockefeller III to promote greater knowledge of
Asia in the U.S., the Asia Society of Northern
California fulfills its educational mandate through
a wide range of cross-disciplinary programming
that has expanded in more recent years to include
Asian American issues, the effects of
globalization, and issues in Asia including the
status of women, environmental challenges and
rapid urbanization. The Northern California
chapter opened in 1998, hosting a variety of
business-focused, cultural and high-level policyrelated
events.
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Ties That Bind, 2014 Edition
34

5. TRADE AND TOURISM
Poised for a Breakout?
The flow of goods, services and visitors between
countries, while not presenting a full picture, is
perhaps the most direct indicator in an economic
relationship.
Direct economic benefits from manufactured
trade passing through an area where major harbors
and international airports are located—cargo
handling, warehousing and distribution, fueling
and repair services, tug and barge operations,
cargo vessel and jet maintenance and repair,
freight brokerage, trade finance and legal services,
etc.—are obvious.
Measuring trade using only data from ports of
entry and departure often misses the bigger
question of where primary value is added; data
can fail to capture intercompany transfers and e-
commerce, where more trade today is now conducted;
tourist arrival and departure data alone
does not give a full picture of the economic contribution
of a visit. It is important to go beyond
raw numbers to understand the overall exchange
of goods and services.
In the five years following China’s 2001 entry
into the World Trade Organization, U.S. exports
to China grew from $19.2 billion in value to $55.2
billion; U.S. imports from China grew from $102.3
billion to $287.8 billion. China’s two-way trade
with the world more than tripled, from $509.7
billion, to $1.76 trillion.
U.S. West Coast harbors and airports were
swamped with Chinese import cargo. China’s low
wages, government subsidies, concessionary
loans and tightly controlled currency pegged to
the dollar brought down global manufacturing
costs. Low-cost Chinese products provided welcome
breathing space for U.S. consumers at a
time of stagnant wage growth, depleted savings
and overextended credit.
This perfect storm fed a wave of discount retailing
that, by 2005, added port calls,
prompted expansion of cargo handling facilities
and spurred new harbor warehousing and distribution
center development along the I-80 and
I-580 corridors, as far north as Reno, Nevada
and east to Stockton and Tracy. Import container
traffic from China through the Port of
Oakland more than tripled over 2001–06, from
55,000 40-foot equivalent unit (FEU) containers
to 188,000; exports doubled over 2002–05 from
52,000 FEU to 102,000.
China’s Trade with the United States, 2002–12 (USD billions)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
U.S exports 22.1 28.4 34.7 41.8 55.2 65.2 71.5 69.6 91.9 103.9 110.5
Percent
change* +14.7 +28.9 +22.2 +20.5 +32.0 +18.1 +9.5 -2.6 +32.1 +13.1 +6.5
U.S. imports 125.2 152.4 196.7 243.5 287.8 321.5 337.8 296.4 364.9 399.3 425.6
Percent
change* +22.4 +21.7 +29.1 +23.8 +18.2 +11.7 +5.1 -12.3 +23.1 +9.4 +6.6
U.S. balance -103.1 -124.0 -162.0 -201.6 -232.5 -256.3 -266.3 -226.8 -273.1 -295.5 -315.1
Source: U.S. International Trade Commission (ITC), U.S. Department of Commerce
*Calculated by The US-China Business Council. U.S.; exports reported on a free-alongside-ship basis; imports on a
general customs-value basis.
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Ties That Bind, 2014 Edition
China Services Trade, 2011 and 2012 (USD billions)
Imports
Exports
2011 2012 2011 2012
Travel 2.691 2.812 5.689 6.486
Passenger Fares 0.614 0.678 2.051 2.284
Other Transportation 3.081 3.142 2.358 2.308
Royalties and License Fees 0.186 0.5 4.114 4.817
Other Private Services 4.757 5.858 12.49 14.138
Total Private Services 11.329 12.990 26.702 30.033
Source: Bureau of Economic Analysis (BEA), U.S. Department of Commerce
Top Bay Area imports included furniture, electronics,
computers, toys, plastic products, tools,
tires and sporting goods. Top exports were aluminum
ingots and shapes, animal feed, beverages,
industrial clay, cotton, dried fruits and nuts,
pharmaceuticals, earths/minerals, food products
and hay. Non-containerized bulk exports included
scrap metal, wood pulp, petroleum products
and chemicals.
Nearly $9 billion in Chinese air cargo imports
entered San Francisco, Oakland and San Jose
International Airports in 2005. Products ranged
from fashion apparel and luggage to pharmaceuticals,
seafood, gems, fresh-cut flowers and electronics.
Some $6.8 billion in Bay Area exports
included fresh and frozen fruit and vegetables,
vitamins, cosmetics, lab reagents, semiconductors,
medical devices, machine tools and data
processing equipment.
Total two-way manufactured trade with greater
China through the San Francisco Customs District
in 2005 was nearly $27 billion: $18 billion in imports,
and $9 billion in exports.
Since then, from 2006–12, two-way U.S.-China
trade has grown steadily, with the exception of
2009 at the peak of the world recession. U.S. exports
to China doubled, while imports from China
increased by nearly half (48 percent); the U.S.
trade deficit grew by over 35 percent.
In 2012, the U.S. was China’s top trading partner,
its top export destination and its fourth largest
import supplier; China grew to become the third
largest market for U.S. manufactured exports, after
Canada and Mexico.
Regarding services, the U.S. Commerce Department’s
Bureau of Economic Analysis (BEA)
reports that in 2012, China ranked fourth globally
as a purchaser of U.S. service exports ($30.03
billion) and tenth as a provider of services to the
U.S. ($12.99 billion). This trade is broken out in
the table above.
U.S. service exports to China have increased
steadily every year since 1992, and have tripled
from $8.4 billion in 2005. Imports of services
from China have increased in all but three years
since 1992, and have doubled from $6.15 billion
in 2005.
The “Other Private Services” category referenced
above is mainly comprised of education,
financial services, insurance services, telecommunications,
and a catch-all category, “business,
professional and technical services,” which is
where the bulk of total U.S.–China services trade
is conducted. Of the nearly $12.5 billion in 2011
“Other Services” exports to China, $10.3 billion
was direct, unaffiliated trade, while another $2.2
billion was inter-company business involving U.S.
parent firms or affiliates. U.S. firms exported
nearly $5.2 billion in business, professional and
technical services to China in 2011—the largest
single services category. Topping the list of these
services, in order, were
architecture, engineering and construction;
installation, maintenance and repair
of equipment;
management consulting;
operational leasing; and
industrial engineering.
Chinese firms provided nearly $4 billion in
business, professional and technical services to
U.S. customers. The top services categories were
research, development and testing;
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Trade and Tourism
computing/data processing; and
installation, maintenance and repair
of equipment.
During 2005–11, U.S. services exports to Hong
Kong increased from $3.8 billion to $6.1 billion,
while imports grew from $5.0 billion to $6.9 billion.
During that same period, service exports to Taiwan
increased from $5.8 billion to $10.5 billion, and
imports rose from $6.4 billion to $6.7 billion. As
with mainland China, most of the services moving
in either direction involved business, professional
and technical services.
Drilling Down to the
Regional Level
California two-way trade with China totaled nearly
$142 billion in 2012—$127.7 billion in imports
and $14 billion in exports, according to the Governor’s
Office of Business and Economic Development.
A report from The US-China Business
Council (USCBC) lists the California’s top exports
to the PRC as follows:
Computers and electronics
Waste and scrap
Machinery (except electrical)
Transportation equipment
Chemicals
$3.9 billion
$2.4 billion
$1.4 billion
$1.4 billion
$878 billion
USCBC’s estimate of $13.6 billion in California
exports to China in 2012 is down slightly from
$13.9 billion in 2011, but well above the $10.7
billion reported in 2008.
The Council’s report, “U.S. Congressional
District Exports to China: 2003–12”, crossreferences
U.S. Census Bureau, U.S. Department
of Agriculture and Moody’s Analytics trade and
business databases to obtain a more detailed
snapshot of export origination by congressional
district and county. Its export profiles for 12 Bay
Area congressional districts are as follows:
District 2: Marin, Napa, Sonoma and other Counties
2012 China exports: $216 million
Export growth to China, 2003–12: 297 percent
Top 5 exports to China:
Crop production; computers/electronics; seafood; machinery;
waste/scrap.
District 5: Contra Costa, Napa, Solano and Sonoma Counties
2012 China exports: $226 million
Export growth to China, 2003–12: 310 percent
Top 5 exports to China:
Crop production; computers/electronics; beverages;
machinery; petroleum/coal products
District 9: Contra Costa and other Counties
2012 China exports: $207 million
Export growth to China, 2003–12: 310 percent
Top 5 exports to China:
Transportation equipment; crop production; processed foods;
waste/scrap; petroleum/coal products.
District 11: Contra Costa County
2012 China exports: $179 million
Export growth to China, 2003–12: 287 percent
Top 5 exports to China:
Petroleum/coal products; transportation equipment; chemicals;
primary metal manufacturing; computers and electronics.
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Ties That Bind, 2014 Edition
District 12: San Francisco County
38
2012 China exports: $45 million
Export growth to China, 2003–12:
Top 5 exports to China:
176 percent
District 13: Alameda and San Francisco Counties
2012 China exports: $255 million
Export growth to China, 2003–12:
Top 5 exports to China:
Waste and scrap; seafood; computers/electronics; chemicals;
primary metals manufacturing.
202 percent
Transportation equipment; waste/scrap;
computers/electronics; machinery; chemicals.
District 14: San Francisco and San Mateo Counties
2012 China exports: $177 million
Export growth to China, 2003–12:
Top 5 exports to China:
78 percent
District 15: Alameda and Contra Costa Counties
2012 China exports: $386 million
Export growth to China, 2003–12:
Top 5 exports to China:
Transportation equipment; computers and electronics; waste
and scrap; crop production; machinery
210 percent
District 17: Alameda and Santa Clara Counties
2012 China exports: $1.33 billion
Export growth to China, 2003–12:
Top 5 exports to China:
Transportation equipment; computers and electronics;
machinery; waste/scrap; petroleum/coal products.
58 percent
Computers/electronics; machinery; transportation equipment;
chemicals; electrical equipment.
District 18: San Mateo, Santa Clara and Santa Cruz Counties
2012 China exports: $442 million
Export growth to China, 2003–12:
Top 5 exports to China:
District 19: Santa Cruz County
54 percent
2012 China exports: $327 million
Export growth to China, 2003–12:
Top 5 exports to China:
Computers and electronics; machinery; chemicals; transportation
equipment; miscellaneous manufacturing.
20 percent
Computers/electronics; machinery; transportation equipment;
waste/scrap; miscellaneous manufacturing.

Trade and Tourism
District 20: Santa Clara, Santa Cruz and other Counties
2012 China exports: $141 million
Export growth to China, 2003–12:
Top 5 exports to China:
135 percent
Computers/electronics; waste/scrap; machinery; processed
foods; crop production
Bay Area companies across a range of industries
have secured a foothold in the China market.
The industries span technology and a wide range
of services as well as consumer goods. In the apparel
sector, for example, outdoor apparel company
North Face has grown its sales in China
from $60 million to $1.7 billion in the last ten
years, with year-on-year growth averaging 50
percent. North Face clothing is carried in more
than 600 stores throughout China. Levi Strauss
has operated in China for more than a decade. In
the China market for only two years, by the fall of
2013 Gap Inc. already had 73 stores in 19 cities
in mainland China, with plans to go to 80 by early
2014. The company’s first Old Navy store in
China will open in Shanghai in the spring of 2014,
and the Gap brand will expand to Taiwan.
Retailers such as North Face, Levi Strauss and
Gap benefit from strong brand awareness—for
which many customers are prepared to pay a
premium—and a consumer market that is moving
upscale. Brand awareness has also exacerbated
problems with counterfeit goods, which are rampant.
Increasingly, affluent Chinese consumers
are gravitating to the prestige and quality of recognized
brands. For companies such as North
Face, however, the scale of the knock-off market
may exceed actual company sales.
The Bay Area’s Tesla Motors faces similar opportunities
and challenges. Tesla first tested the
market in Hong Kong, with a robust response
(hundreds of would-be purchasers paid $500–
$42,500 for reservations). Pre-order Model S
bookings on the mainland opened in August
2013, with an 8,000-square-foot LEED Platinum
certified showroom scheduled to open in Beijing.
While Tesla is in a strong position to establish
itself in the high-end market, competition for the
mass market from domestic companies such as
BYD will be strong. The company has also been
engaged in a trademark dispute with a Chinese
businessman who acquired rights to the Tesla
name (in Chinese characters), the Tesla T logo,
and the Tesla logo. While uptake on all-electric
vehicles has been slow to date, the Chinese government
is actively supporting alternative energy
vehicle deployment, with subsidies of up to
$10,000 for all-electric cars.
U.S. Census trade data focuses on the various
harbor, airport and inland gateways that make up
the San Francisco Customs District. As a result,
figures include not only goods produced in or
destined for end users in the Bay Area, but also
cargo passing through en route to and from other
locations. Still, gateway data is a useful indicator
of aggregate transportation, cargo handling and
related trade support activities in the region.
PRC imports destined for the San Francisco
Bay region and throughout the U.S. continue to
outpace exports, but the Bay Area enjoys a more
balanced trade with Taiwan. An apparent trade
surplus with Hong Kong may actually reflect increased
transshipment cargo into China or elsewhere
in Asia.
When the USCBC congressional district/county
origin data is overlaid onto the Census District PRC
trade figures, a significant data point emerges:
some $4 billion of the total $6.4 billion in 2012 U.S.
exports moving through the San Francisco Customs
District to China—nearly two-thirds—originated
within the San Francisco Bay region.
While the San Francisco district runs a net
trade deficit with China by value, exports moving
by volume—petroleum products, soybeans, steel,
machinery, bulk minerals and oils, industrial clays
and earths, fertilizer—well exceed imports. Most
of these cargoes move via bulk shipping.
Higher-value imports—auto parts, retail merchandise,
home and garden supplies, furniture,
appliances, electronics—move in containers, most
via Oakland. Richmond and Martinez alone saw
cargo growth in 2012 reflecting increased shipments
of bulk petroleum products and, at Richmond,
automobile imports.
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Ties That Bind, 2014 Edition
Trade Flows through San Francisco District Ports/Airports, 2008–12 (USD billions)
$20
$18
$16
Exports
Imports
PRC
$14
$12
$10
Trade Value in Billions of Dollars
$8
$6
$4
$2
$0
$4
$3
$2
$1
$0
2008 2009 2010 2011 2012
Hong Kong
2008 2009 2010 2011 2012
$6
$5
$4
$3
$2
$1
$0
Taiwan
2008 2009 2010 2011 2012
Source: U.S. Census Bureau USA Trade Online; analysis by Bay Area Council Economic Institute
40

Trade and Tourism
Imports from China through Top Bay Area Ports/Airports, 2011–12 (by USD value)
By Water 2011 2012
Port of Oakland 13,436,625,321 12,499,541,756
Port of San Francisco 356,152,974 313,295,501
Port of Richmond 40,087,607 63,608,394
Port of Stockton 30,223,451 51,887,287
By Air 2011 2012
SF Intl. Airport 4,691,884,425 4,947,998,921
Oakland Intl. Airport 2,704,509 1,368,710
San Jose Intl. Airport 1,026,297 2,099,891
Sacramento Intl. Airport 207,094 170,639
Source: U.S. Census Bureau USA Trade Online
Top 10 Import Commodities, 2011–12
By Air By Water By Value By Volume
Electric machinery Mineral fuel/oil Electric machinery Home furnishings
Integrated circuits Crude oil Nuclear power eqpt. Plastics products
Nuclear power eqpt. Vehicles Data processing eqpt. Electric machinery
Data processing eqpt. Nuclear power eqpt. Telecom eqpt. Glassware
Optical/medical eqpt. Electric machinery Office machine parts Nuclear power eqpt.
Telecom eqpt. Data processing eqpt. Integrated circuits Iron/steel products
Office machine parts Petroleum/coal oil Broadcasting eqpt. Fertilizers
Repaired/returned goods Beverages/spirits Optical/medical eqpt. Toys/games/sports eqpt.
Semiconductor eqpt. Home furnishings Elect. transmission eqpt. Vehicles
Semiconductor devices Apparel Television/video eqpt. Chemicals/rare earths
Source: U.S. Census Bureau USA Trade Online
Exports to China through Top Bay Area Ports/Airports, 2011–12 (by USD value)
By Water 2011 2012
Port of Oakland 2,901,691,057 3,028,182,134
Port of San Francisco 204,083,731 116,800,361
Port of Richmond 75,598,188 68,943,631
Martinez 59,730,473 19,619,484
Port of Stockton 48,144,556 43,752,910
By Air 2011 2012
SF Intl. Airport 2,553,475,445 3,100,132,932
Oakland Intl. Airport 12,737,009 10,897,942
San Jose Intl. Airport 12,288,667 14,409,205
Sacramento Intl. Airport 4,291,777 4,087,991
Source: U.S. Census Bureau USA Trade Online
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Ties That Bind, 2014 Edition
Top 10 Export Commodities to China through U.S. Airports/Ports
By Air By Water By Value By Volume
Electric machinery Wood Pulp Electric machinery Wood pulp
Optical/medical eqpt. Wastepaper Nuclear power eqpt. Wastepaper
Oscilloscopes Fruits/nuts Optical/medical eqpt. Mineral ore
Telecom eqpt. Meat Telecom eqpt. Iron ore
Nuclear power eqpt. Optical/medical eqpt. Data processing eqpt. Mineral fuel/oil
Data processing eqpt. Aluminum products Semiconductor eqpt. Petroleum coke
Integrated circuits Nuclear power eqpt. Oscilloscopes Iron/steel
Semiconductor eqpt. Aluminum scrap Semiconductor devices Scrap iron
Semiconductor devices Cotton/yarn/fabric Integrated circuits Forest products
Medical instruments Photographic products Test/measurement eqpt. Plastics products
Source: U.S. Census Bureau USA Trade Online
Strong Export Potential for California Wine
China’s wine market has grown dramatically in recent years, with
sales of 266 million liters valued at $41 billion in 2012, up 20
percent from 2011; China’s wine imports are projected to grow
by 54 percent over 2011–15, according to research prepared for
Vinexpo, a trade show held alternating years in Hong Kong and
France. Per capita consumption is still only a small fraction of
that in Western countries.
The U.S. ranks sixth among exporting countries supplying the
China market, with about a 5 percent share—well behind France
(48 percent) and Australia (13 percent), Spain (10 percent), Chile
(8 percent) and Italy (7 percent).
California accounts for 90 percent of total U.S. wine exports,
according to the San Francisco-based Wine Institute. The state
shipped $1.43 billion in exports overseas in 2012, up 2.6 percent
from 2011. China imported $74 million worth of California wines
in 2012, up 18 percent from 2011 and double the value shipped
in 2010, making it California’s fifth largest wine export market.
A major growth constraint is perception. Chinese consumers
are largely unaware of higher-end California wines, and distributors
expect a low price point—and volumes—that craft wineries
often cannot meet. Hanson Li, head of cross-border investment
banking and private equity firm Hina Group’s San Francisco office,
says California’s wine export dilemma lies in the United
States’ huge domestic market, which consumes most of what is
produced and where the biggest wine distributors are owned by
large food companies. “When a Napa winemaker decides to expand,
the wine goes to Atlanta, New York or Boston,” he says.
“They don’t know how to export.”
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Trade and Tourism
China sales growth has partly stemmed from tourism, with
Napa and Sonoma Valley increasingly on the itineraries of affluent
Chinese visitors, plus more aggressive marketing by the
state. The Wine Institute, for example, partnered with the publicprivate
trade promotion agency Visit California to organize two
wine delegations to China in April and June 2013, linked to
Governor Brown’s visit. It also coordinated participation of 120
California wineries in a California Wines Pavilion at the Vinexpo
Asia Pacific trade show in May 2012.
Most California wine exports to greater China ship via Hong
Kong, which eliminated duties and administrative controls on
wine in 2008 in order to position itself as a regional wine trading
and distribution hub offering specialized logistics and warehouse
storage, as well as promotional events. Under the Mainland-
Hong Kong Closer Economic Partnership Arrangement (CEPA),
wine fermented and bottled in Hong Kong can enter China dutyfree;
imported wine entering via Hong Kong pays a 20 percent
tariff. Wine imported directly into the PRC incurs duties and
taxes of 38–56 percent.
From 2007–12, Hong Kong wine imports increased four-fold,
to 50.6 million liters valued at HKD 8.1 billion; 37 percent was
re-exported, mostly to the mainland and Macau, with the rest
consumed in Hong Kong. That included HKD 1.2 billion in sales
of premium, investment-grade wines at auction in 2012. U.S.
wine exports to Hong Kong represented only 6.4 percent of that
market in 2012.
A recent Bain Capital study of the global luxury goods market
cited in SVB’s 2013 Wine Report, points to broadening interest
in wine among affluent Chinese consumers, from very wealthy
collectors of rare French vintages to younger professionals, especially
frequent travelers, with a concurrent rise in e-commerce,
direct-to-consumer winery sales and wine tourism.
In September 2012, China UnionPay, San Francisco-based
card processing and co-branding intermediary NuPay System
International, East-West Bank and San Francisco e-commerce
marketer The California Place hosted a St. Helena seminar to
support area wineries with direct-to-consumer sales as well as
exports to China. NuPay’s My Wine Card—a premium gift card
currently offered initially through Chong Hing Bank in Hong
Kong, provides special discounts on duty-free red wines popular
with Chinese consumers. The card enables Chinese tourists to
easily buy wine in California and have it shipped home, and includes
a concierge ‘help desk’ service. The California Place is
opening an e-commerce portal in 2013, and a physical store in
Shanghai in 2016, that will import and sell California wines
through Chinese foreign trade zones.
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Ties That Bind, 2014 Edition
A Matter of Geography
More than a third of U.S. container imports from
Asia enter the U.S. through Southern California, a
massive population and manufacturing center in
its own right and a major gateway to rail corridors
serving the East, Midwest and Sunbelt states.
Importers can alternatively shave 1–2 days off
transit time to Chicago or New York by shipping
via the Pacific Northwest. As a result, container
lines tend to run loop services calling at Seattle-
Tacoma or Los Angeles-Long Beach first, then
calling at the Bay Area before returning to Asia.
Relatively few lines call at Oakland first with inbound
cargo. Two-way container cargo through
Oakland has held steady in a range of roughly
850,000–900,000 FEU annually since 2005, totaling
889,000 in 2012. The difference has been in
the balance of imports versus exports. In 2005,
both were almost exactly in balance; in 2012,
imports totaled 396,000 FEU while exports totaled
more than 493,000.
That difference, in large part, is due to an ebb
in China trade during the global downturn that
has continued since; China accounts for 48 percent
of containerized imports moving through
Oakland, but less than 17 percent of exports,
which continue to grow but from a smaller base.
Slower demand has inhibited growth in new harbor
warehousing and inland distribution center
development tied to the Port, and in trucking and
rail traffic.
Amid the rapid growth in 2004–05, the Port of
Oakland was able to obtain federal funds to
complete dredging of harbor channels and terminal
berths to accommodate larger containerships.
Lines expressed interest at the time in inbound
first calls and held trials. As cargo demand
eased, however, those services proved unsustainable.
The Port is making a bet on future growth
with the $500 million development of the vacant
160-acre former Oakland Army base—now the
Gateway Industrial District—with added container
terminal acreage, near-dock rail access and logistics
facilities.
Another critical piece of the puzzle for Oakland
is the widening of the Panama Canal to accept
larger ships, a project that will be completed
by the end of 2014. Canal expansion is expected
to mean less inbound container cargo from Asia
that is destined for transshipment by rail to the
east, as more shipping moves by water via Panama
directly to Atlantic and Gulf Coast ports.
In 2010, the Port strengthened its ties with
China through a memorandum of understanding
with China Merchant Holdings (International)
Company Limited (CMHI), a leading Chinese container
terminal operator and logistics provider. The
agreement creates a strategic relationship by establishing
joint services and benefits for shippers
and ocean carriers. CHMI currently controls onethird
of Chinese container traffic.
Up in the Air
On the air freight side, few international carriers
operate pure air cargo services out of San Francisco,
Oakland or San Jose international airports,
because regional volumes similarly tend to concentrate
in Southern California. Niche international
airlines in Asia are maintaining pure air
cargo service for specific customer bases, but
most airlines are scaling back and combination
passenger-cargo service is declining. The strongest
growth has been at package express carriers
such as Federal Express, United Parcel Service
and DHL, with an expanding online fulfillment
cargo base from retailers like Amazon.com.
Oakland remains the dominant Bay Area airport
for these services, with FedEx and UPS hubs,
but San Jose has been gaining market share due
to improved facilities and proximity to Silicon
Valley, where companies originate shipments of
high-value, time-sensitive electronics products
and components. FedEx, meanwhile, is undertaking
a $30 million upgrade to its 75-acre Oakland
sorting facility, where it employs 1,300
workers. The expansion will increase international
sorting capacity four-fold and domestic capacity
by 40 percent, and will accommodate larger,
more fuel-efficient Boeing 777 planes. The added
capacity is tied, in part, to the opening of new
FedEx hub facilities in China and India.
U.S.-China Trade in Perspective
As mentioned previously, weaknesses in the data
make it easy to inflate the economic impact of
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Trade and Tourism
trade with China, particularly in discussing trade
imbalances. In a 2011 economic letter, “The U.S.
Content of ‘Made in China’,” the Federal Reserve
Bank of San Francisco (FRBSF) examined the
share of U.S. consumer spending allocated to
goods and services “made in China” and how
much of that share reflects the actual costs of
Chinese imports paid to a Chinese seller.
FRBSF conducted its research in part to understand
the true scope and impact of the U.S. merchandise
trade deficit with China, but also to
measure the potential impacts of Chinese inflation
on consumer prices over time. The study produced
some noteworthy findings. Among them are
the following:
Imports amounted to 16 percent of U.S. GDP
in 2010, but imports from China comprised
only 2.5 percent of U.S. GDP.
Chinese-made goods sold in the U.S. are still
concentrated in a small number of retail and industrial
sectors; they comprise 20 percent of
U.S. consumer purchases of furniture, household
goods/appliances and electronics; 35 percent
of clothing and footwear purchases; and
smaller shares in other categories like tools,
hardware, toys, bicycles, sporting goods,
building and garden supplies, and so on.
Foreign goods make up only 11.5 percent of total
U.S. consumer spending, with Chinese goods
accounting for a quarter of that at 2.7 percent.
Less than half of that 2.7 percent share—1.2
percent of consumer spending—represents
the actual cost of the imported Chinese goods
after U.S. transportation, marketing and branding,
warehousing, distribution and retail activities
are backed out.
Of every dollar spent by U.S. consumers on
goods labeled “Made in China,” an average
of 55 cents is spent on services originating in
the U.S.
Factoring in the cost of Chinese-produced inputs
to consumer goods sold in the U.S., the
Chinese share of U.S. consumer spending is
1.9 percent.
FRBSF also cites the example of an Apple
iPhone sold in the U.S. in 2009 for $500 (a portion
of that cost carrier-subsidized), with an estimated
$179 cost of “manufacture” in China. Of that
amount, $172.50 was for components sourced
globally (including $10.75 in U.S.-made inputs to
foreign-sourced components) and $6.50 was for
assembly in China.
Along these same lines, McKinsey & Company
developed a domestic value-added exports
(DVAE) measure in 2010 as part of an effort to assess
Chinese exports’ actual contribution to
China’s GDP during the global downturn. This was
done by backing out raw materials, parts and subassemblies
imported for use in the manufacture of
finished export products.
Geography of U.S. Personal Consumption Expenditures, 2010
81.9%
Made in U.S. from U.S. parts
Made in U.S. from parts imported from other countries
5.9%
0.7%
6.1%
1.2%
2.7%
1.5%
Made in U.S. from parts imported from China
Final goods imported from other countries
Final goods imported from China
U.S. content of "Made in" other countries
U.S. content of "Made in China"
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau; analysis by FRBSF
45

Ties That Bind, 2014 Edition
Measuring total export growth relative to total
GDP growth, a standard benchmark, China’s exports
have typically been characterized as contributing
an average of 60 percent to real GDP
growth since 2000. Using the DVAE measure,
McKinsey estimated that only about half of the
total value of Chinese exports reflects actual
value added in China, and that exports contributed
only 19–33 percent of annual GDP growth
from 2002–08.
At the same time it should be noted that
China's export mix is gradually moving up the
value chain and, as it does, domestic content is
increasing as a share of finished product. Over
2011–12, Chinese exports of electronics products
and components, computers, auto parts and optical
devices grew 24 percent to $129 billion,
even as apparel and footwear shipments increased
only 5 percent to $47 billion. This is also
in part a reflection of rising PRC production costs
and the migration of lower-end manufacturing to
elsewhere in Asia or to Latin America. Analyses
by the WTO and OECD confirm that the share of
local content in Chinese exports overall is rising.
The Wall Street Journal cites a Hangzhou company,
Inventronics, Inc., as an example of the
trend. The company, founded in 2007, makes
LED lighting power supply units and has grown in
six years to a workforce of 1,000. Inventronics
units power the nighttime light display on the San
Francisco Bay Bridge; while its primary suppliers
are in China, the integrated circuits in its units are
from the U.S.
Policy Concerns
In its 2012 Report to Congress on China’s WTO
Compliance, the Office of the United States
Trade Representative (USTR) asserts that by 2006,
having substantially met its commitments as a
WTO member, China was moving to consolidate
and strengthen its state-owned enterprises (SOEs)
in ways that “led to institutionalized preferences
for state-owned enterprises and the creation of
national champions in many sectors.” Key issues
that were raised included
technology transfer requirements as a
precondition for foreign direct investment
in China;
use of antidumping and countervailing duties
investigations as retaliation for unrelated
actions by foreign countries that China
finds objectionable;
inadequate enforcement of intellectual property
rights, particularly with regard to trade secrets
and to online and software copyrights;
delays in opening China’s government procurement
system to foreign suppliers as
required under WTO rules;
export restrictions on rare earths, tungsten
and molybdenum, for which there is significant
global demand and China is the dominant
global producer, and on upstream raw materials
used in the production of aluminum and
chemicals, where China also competes with
buyer countries;
China’s establishment of a national champion,
UnionPay, as the exclusive provider of electronic
credit card payment processing services,
through which all foreign credit card
firms must process transactions for a fee,
versus using their own networks; and
central government and provincial subsidies to
auto parts manufacturers in regions of China
designated as “export bases.”
More recently, a dispute directly affecting
Northern California surfaced regarding tech exports.
WTO talks over expanding a multilateral
1996 Information Technology Agreement (ITA)
broke down in July 2013 over China’s objection to
including 148 technology products on a list of 256
targeted for tariff elimination. Among the products
in contention were semiconductor manufacturing
equipment, high-end memory chips, medical devices
and audio-visual equipment such as DVD
players and video cameras. The expanded product
list would cover an additional $800 billion in trade
and would translate into a further $2.8 billion in
U.S. exports annually. China maintains that the
items in contention are “sensitive” and is reportedly
reluctant to abandon the tariffs it uses to
encourage indigenous innovation.
High levels of government subsidy to industry
have raised issues of competitive fairness for
many foreign companies and their governments,
leading to a range of investigations and in some
cases significant compensatory tariffs (for example,
for telecommunications equipment, automobiles,
46

Trade and Tourism
steel and solar panels). One recent analysis finds
that companies listed on China’s stock exchanges
received more than $13 billion in subsidies in
2012, up 23 percent from 2011 and equivalent to
4 percent of those companies’ total profits.
Subsidies come from both national and local
government in the form of cheap land, tax rebates,
support for loan repayments, and cash,
often connected to economic development, R&D,
environmental or other goals, such as the creation
of national companies that can lead in global
markets. Analysis by Hithink finds that more than
half of the 2,400 companies listed in mainland
China receive government support, of which
more than half are state-owned enterprises.
Intellectual property (IP) protection and cyber
security are also continuing concerns, particularly
for many Bay Area companies whose product
value is IP-based. A 2013 report by the independent
bipartisan Commission on the Theft of
Intellectual Property found that annual losses to
the U.S. economy from international IP theft total
some $300 billion per year, 50 percent to 70 percent
of which (depending on the industry) is
linked to China.
The report, reflecting analyses from a variety
of sources, attributes this to industrial policy
goals that encourage IP theft and an extraordinary
number of Chinese business and government
entities engaged in the practice. While,
under foreign pressure, administrative improvements
have been made that address these concerns,
their application has been uneven and, if
anything, cyber attacks are increasing.
High-profile hacks of the New York Times,
Wall Street Journal, Google and other firms have
been reported. In early 2013 Mandiant, a major
private security company, traced “one of the
most prolific cyber espionage groups in terms of
the sheer quantity of information stolen” to a
People’s Liberation Army intelligence facility in
Shanghai, one of 20 Advanced Persistent Threat
(APT) groups it had been tracking in China.
Mandiant found that the unit has “systematically
stolen hundreds of terabytes of data from at
least 141 organizations” spanning “broad categories
of intellectual property , including technology
blueprints, proprietary manufacturing processes,
test results, business plans, pricing documents,
partnership agreements, and emails and contact
lists from victim organizations’ leadership,” adding
that the targeted companies “match industries that
China has identified as strategic to their growth,
including four of the seven emerging industries
that China identified in its 12th Five-Year Plan.”
Finally, it should be noted that political issues
can impact trade in both directions, particularly
for larger U.S. companies doing business with
government-affiliated entities. Sales by Bay Area
IT companies, for example, were likely impacted
by public disclosures in 2013 of the National Security
Agency’s monitoring of global communications,
as well as by issues surrounding market
access in the U.S. for Chinese companies.
A Nascent Two-Way
Tourism Trade
Tourism is an especially high-value services trade.
Its benefits ripple out beyond air fares, hotel
rooms and car rentals, to include restaurant and
retail sales, and support services from taxis to
tour guides to conference organizers, parking
services, sporting events and the arts.
While business travelers arriving in the U.S.
from China are hardly a new phenomenon, it was
only in December 2007 that China granted the
U.S. “approved destination status,” allowing Chinese
citizens to visit as tourists. At that time,
397,000 Chinese nationals visited the U.S. annually,
spending an average $6,000 per person
while here, for an average three-week stay. An
estimated 275,000 visited California in 2008.
As China’s emerging middle class broadens its
horizons, Chinese vacation travelers are emerging
as a fast-growing market. The Bay Area is a prime
destination, for many reasons: it is the closest
destination on a long trans-Pacific flight; many
visitors have friends or family here; the region
boasts the largest Chinese community outside of
China and cultural ties dating back 160 years; and
it is home to iconic attractions such as the Golden
Gate Bridge, cable cars, Chinatown, Silicon Valley
and the Napa-Sonoma wine country.
The U.S. Department of State, which issues
travel visas and records visitors on a fiscal year
basis (October 1 through September 30), reports
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Ties That Bind, 2014 Edition
nearly 1.5 million Chinese visitors in the U.S. during
2012, up from 1.18 million in fiscal 2011; China’s
National Tourism Administration (NTA) forecasts 2
million visitors annually by 2015.
Until early 2012, many prospective Chinese
visitors were discouraged from traveling to the
U.S. by the burdensome tourist visa process, an
outgrowth of 9/11 security initiatives. Visas could
only be obtained through the U.S. Embassy in
Beijing and four consulates in Chengdu, Guangzhou,
Shanghai and Shenyang. An in-person interview
is required and high demand created
two-month average wait times in Beijing and
Shanghai in 2011.
China views this as a trade issue: the visa
process disadvantages its international air carriers
because they are heavily reliant on outbound
travelers for their core business. As a result, the
government has been slow to expand landing
rights in Tier 2 and Tier 3 cities to U.S. passenger
airlines—another reason is that China’s military
only opens 30 percent of the country’s airspace
for commercial flights—and the existing international
airports are limited in number and are at or
near capacity.
Beginning in 2012, the State Department has
expedited Chinese tourist visas with expanded
embassy and consulate waiting areas and office
space, more interview windows and added staff,
cutting wait times in most cases to about a week;
repeat visitors can renew their visas through a bank
drop-off service, with processing as quickly as five
days. In the first two quarters of fiscal 2012, State
had issued 453,000 visas. By the end of the third
fiscal quarter (June 30), a year-to-date total of
more than 1 million visas had been issued.
Tourism Trends
An average Chinese tourist’s stay in the U.S. is
two weeks. Most trips center on some mix of four
destinations: San Francisco, Los Angeles, Las Vegas
and New York City. Most visitors book their
trips through travel agents, and tend to use
agents in the big cities with more experience and
relationships with major tour groups.
China’s NTA has opened a Visit USA Center in
Shanghai, and has made presentations in Tier 2
cities such as Chongqing, Chengdu, Shenyang
and Dalian to educate agents about U.S. travel. In
November 2011, Visit USA teamed up with the
U.S. Commerce Department to host a U.S. tour
by more than 30 agents, to connect them with
pre-screened travel providers.
The Chinese Tourism Academy reports that
vacations now make up 85 percent of outbound
Chinese travel, owing to several factors, among
them an appreciating Chinese currency, more
public holidays, reduced travel restrictions, more
travel product and service options, and more
Approved Destination Status countries.
Top travel trends among Chinese visitors going
abroad include the following:
Sightseeing and shopping are the major purposes
of leisure trips.
Travel spending grew by 25 percent in 2011, to
$69 billion, and is estimated to have reached
$85 billion for 2012.
Travel is highly seasonal, in May, October
and December.
Younger, high-income professionals account
for much of the growth in travel demand.
More visitors are moving away from pricebased
tours to more individualized visits.
Most travelers research trips online, but most
bookings are still made through travel agents.
Recent visitors spend more time at fewer locations
for a more in-depth experience; cost is still
the main driver in choosing a destination; other
factors include safety, good food (preferably
Asian), comfort (Chinese-style service standards,
cultural sensitivity) and world-famous landmarks.
Shoppers look for Chinese-friendly service, bilingual
staff, acceptance of China UnionPay credit
cards and international shipping.
San Francisco International Airport (SFO) is the
only Bay Area airport with scheduled passenger
flights to and from greater China. In 2012, 4.3
million passengers traveled to and from Asia via
SFO—about 45 percent of its total 9.5 million
international passengers, and a 5 percent increase
from the nearly 4.1 million Asia passengers
in 2011. SFO is one of only 10 U.S. airports with
non-stop connections to China, Taiwan and
Hong Kong.
The airport does not provide a breakdown of
Asia regional data by country, and total passenger
48

Trade and Tourism
numbers include travelers passing through on
connecting flights. San Francisco Travel (formerly
the San Francisco Convention and Visitors’ Bureau)
estimates that San Francisco hosted some 4
million international visitors in 2011, up 10 percent
from 2010 and 30 percent from 2009. Of
that 2011 total, some 800,000 visitors arrived
from Asia, including 198,000 from China, 60,000
from Taiwan and about 50,000 from Hong Kong.
More than a third of Chinese visitors were traveling
on vacation, and more than a quarter came
for business, 19 percent visited family or friends,
and 13 percent were students. Up to 60 percent
were connecting through to other U.S. locations,
while 40 percent were staying in the area.
Most visitors from China still arrive in tour
groups, spend a day and night in the Bay Area
taking photos of major attractions, drive down
the coast to Los Angeles, and from there head
east to Las Vegas, stopping on the way at outlet
malls that have sprung up in Barstow and elsewhere
along the route. From there they continue
either to the East Coast, mainly New York City, or
to Hawaii before returning home.
San Francisco Travel executive vice president
for tourism Tom Kiely says that little by little, however,
the market is trending younger, more affluent
and more sophisticated. “They’re moving away
from traveling in groups on a budget; they’re
staying at more affluent hotels, not out at the airport,”
he says. “They’re shopping at some very
high-end stores, but it’s just beginning. We’re
working very hard to get them to stay in the city
longer to enjoy all we have to offer. We expect to
see a real shift over the next five to ten years.”
The growing impact of Chinese shoppers can
be seen at the Livermore Premium Outlets mall in
the East Bay, where more than 54 buses of Chinese
shoppers visited in the month of October
2013. More than half of Chinese visitors to the
mall are individuals who are not on organized
tours, suggesting that more than 5,000 Chinese
visitors made purchases in Livermore in that
month alone.
Kiely expects a short-term uptick in Taiwan
visitors, following an October 2012 announcement
by the U.S. Department of Homeland Security
(DHS) adding Taiwan to its Visa Waiver Program
(VWP). Under the VWP, visitors from 37
countries that meet DHS security and information
requirements can obtain advance online authorization
through the DHS electronic system for
travel authorization (ESTA) and can visit the U.S.
for up to 90 days without a visa. After South Korea
was admitted to the VWP in 2008, Kiely said,
the number of Korean visitors to the Bay Area
nearly doubled. Singapore and Japan are the
other Asian countries on the VWP list.
Rolling Out the Red Carpet
China became California’s number one source of
international visitors in 2012, when an estimated
677,000 Chinese tourists spent almost $2 billion
in the state, a 31 percent increase over 2011.
Continued strong growth in tourism from greater
China is expected, and California and the Bay
Area have laid the groundwork for receiving it. In
2009, despite the recession and budget pressures,
the California Travel and Tourism Commission
(CTTC) opened offices in Beijing, Shanghai
and Guangzhou to promote the state as a destination.
San Francisco Travel has opened offices
of its own in Shanghai and Beijing.
CTTC’s marketing arm, Visit California, hosted
20 tour groups with a combined 650 Chinese
visitors to the state in early 2012. It has also
launched China Ready, a package of educational
and promotional materials to help travel professionals
better understand the culture and service
requirements of Chinese visitors. Hotels and
travel professionals have also established online
presences on Chinese search portals like Baidu,
and on travel sites such as Ctrip, where visitors
research and plan their vacations.
Hilton, Starwood, Marriott and other hotel
chains have introduced Chinese-friendly services at
select hotels in areas popular with Chinese tourists,
including in the Bay Area. Hilton’s Huanying program,
for example, provides a front desk team
member fluent in Chinese; tea kettles, slippers,
Chinese TV programming and a Chinese welcome
letter in the room; and traditional Chinese breakfast,
including congee, dim sum, Chinese tea and
fried rice or noodles. Hilton reports that Chinese
bookings at participating hotels in the first seven
49

Ties That Bind, 2014 Edition
months of 2012 increased 129 percent over the
same period in 2011.
In 2012, four airlines—United, Cathay Pacific,
Singapore and Air China—offered a combined 49
non-stop flights each week to Hong Kong, Beijing
and Shanghai via SFO, with a combined weekly
capacity for more than 16,000 passengers.
In March 2013, Air China increased capacity
from B747 combi aircraft (passenger-cargo) to
full-passenger aircraft, adding some 450 seats
per week on its daily Beijing service. Later, in
August, Air China extended this service with
one-stop same-plane service via Beijing to the
interior city of Chongqing. China Eastern Airlines
launched daily non-stop Shanghai flights
in April with continuing one-stop same-plane
service to Wuhan and Qingdao on alternating
days, thereby adding over 1,600 seats per week
to China.
In 2014, United Airlines will reinstate daily
non-stop service to Taipei at the end of March,
connecting San Francisco with the main hub of
the new Star Alliance member, EVA Airways.
Additionally, United will launch three-timesweekly,
same-aircraft service to the interior city
of Chengdu, via Shanghai, in June.
50

6. GROWING BUSINESS TIES
Affiliates and Invention
As China’s economy grows and diversifies, its
business ties to the Bay Area continue to grow
and evolve. Earlier chapters described how Chinese
immigrants represent increasing shares of
science, technology, engineering and math occupations
in the region as well as students in Bay
Area universities. Chinese professional associations
and networks help new immigrants get a
foothold in the region’s economy and help entrepreneurs
get their businesses going.
While the Chinese community is diversifying
and growing locally, cross-border invention and
investment are also increasing. These activities
that generate shared value serve to deepen the
ties between the Bay Area and China. The presence
of Chinese companies is on the rise in the
Bay Area, as is the presence of Bay Area businesses
in China.
Business Presence
Foreign companies make up an important part of
the Bay Area’s innovative ecosystem. Increasingly,
foreign companies are opening up R&D
centers in the region to tap into local talent pools
and research facilities. The Bay Area is home to
96 affiliates of Taiwanese companies, 51 affiliates
from China, and 38 from Hong Kong.
The PRC ranks second as a top location for
Bay Area business affiliates abroad. Currently,
there are 795 Bay Area affiliates located in the
PRC, making up 8.6 percent of all Bay Area affiliates
abroad. The Bay Area’s representation
abroad also includes 303 business locations in
Taiwan and 216 in Hong Kong.
Research Collaboration
Bay Area inventors are increasingly collaborating
with inventors in China. Patent registrations that
include a Bay Area inventor and at least one coinventor
located in China increased 422 percent
between 2002 and 2012. In absolute terms,
these patents have increased from 6 to 259 over
the decade. Co-patenting activity with Chinabased
inventors represents a growing percentage
of all foreign co-patenting in the region,
expanding from less than 1 percent in 2002 to
9.9 percent in 2012.
Co-patenting with China has increased particularly
quickly in key technology areas. For example,
since 2005–2006, registrations have increased
by a factor of 5.7 in Computers, Data
Processing & Information Storage and by a factor
of 8.5 in Communications. With the exception of
three technology areas—Apparel, Textiles &
Body Adornment; Dispensing & Material Handling;
and Furniture & Receptacles—all other
technology areas have witnessed growth of at
least 100 percent.
Financial Investment
Since the economic downturn in 2000, private
equity and venture capital investment abroad by
Bay Area firms has grown significantly. Venture
capital in particular represents not just the flow
of cash but also the flow of business acumen, as
well as access to talent and technology. These
high-value transactions require relationships of
trust. Therefore, the growth of this activity is an
indicator for growing interdependencies between
economies.
China accounts for a major part of this growing
activity. While total investment waned in 2008 with
the global financial crisis, the region’s interest in
investing in China held strong. Investment to China
reached $2.7 billion in 2011, representing 38 percent
of all Bay Area investment abroad.
51

Ties That Bind, 2014 Edition
Foreign Affiliates in the Bay Area and Bay Area Affiliates Abroad, 2013
900
800
700
600
500
400
300
200
100
0
Number of Establishments1,000
U.K.
China (PRC)
India
Canada
Japan
Germany
France
Bay Area firms with affiliates in foreign countries
Foreign firms with affiliates in the Bay Area
Australia
Taiwan (ROC)
Singapore
Korea
Hong Kong
Italy
Brazil
Israel
Mexico
Source: Uniworld 2013; analysis by Bay Area Council Economic Institute
Patents with Bay Area and Chinese Co-Inventors
Number of Patent Registrations
52
300
250
200
150
100
50
0
Patents with Bay Area and Chinese co-inventors
Percent of total patents registered with Bay Area and foreign co-inventors
9.9%
1.0% 0.8% 1.4% 1.2%
0.6% 0.8%
0.5%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2.0%
3.5%
3.9%
6.3%
6.2%
7.7%
2004
2005
2006
2007
2008
2009
2010
Source: U.S. Patent and Trade Office; analysis by Bay Area Council Economic Institute
8.6%
2011
2012
Note: Patent counts refer to all patents with an inventor from the Bay Area regardless of inventor sequence number.
12%
10%
8%
6%
4%
2%
0%
Percentage of Total Patents with Bay Area and Foreign Co-Inventors

Growing Business Ties
Bay Area and Chinese Co-Inventor Patent Registrations by Technology Area
Number of Patent Registrations
450
400
350
300
250
200
150
Dispensing & Material Handling
Apparel, Textiles & Body Adornment
Transportation/Vehicles
Teaching & Amusement Devices
Furniture & Recepticles
Food, Plant & Animal Husbandry
Construction & Building Materials
Manufacturing, Assembling & Treating
Health
Chemical & Organic Compounds/Materials
Chemical Processing Technologies
Measuring, Testing & Precision Instruments
Electricity & Heating/Cooling
Communications
Computers, Data Processing & Information Storage
100
50
0
1999–2000 2001–2002 2003–2004 2005–2006 2007–2008 2009–2010 2011–2012
Source: U.S. Patent and Trade Office; analysis by Bay Area Council Economic Institute
Bay Area Global Investment Flow, 1995–2012 (USD billions, inflation adjusted)
Rest of the World
China
Flows to the Bay Area
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Flows from the Bay Area
$25 $20 $15 $10 $5 $0 $0 $2 $4 $6 $8
Source: Thomson Reuters investment database; analysis by Bay Area Council Economic Institute
Note: Investment includes private equity and venture capital deals.
53

Ties That Bind, 2014 Edition
China is also a growing investor in the Bay
Area. Reaching $495 million in 2011, Chinese
investment in the region represented 7 percent of
all foreign private equity and venture capital that
flowed into the Bay Area that year.
The launching of companies on foreign stock
markets is on the rise globally. An initial public
offering, or IPO, is the event in which shares in a
company are offered for sale to the public on a
stock market. Particularly with high-tech companies,
this has served as the primary exit for
investors to recoup their investment and to raise
capital to support a company’s expansion.
Cross-border IPOs accounted for 19 percent
of all global activity from 2002 to 2011. London
and New York are the most international exchanges;
41 percent of all cross-border IPOs took
place in London and 23 percent in New York.
Growing numbers of Chinese companies are
choosing to go public abroad. Over this period,
135 Chinese companies exited in the U.S., accounting
for 51 percent of total IPOs in the U.S.
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7. KEY INDUSTRY SECTORS
A New Set of Synergies
Less than a decade ago China’s economic relationship
with the San Francisco Bay region—as
with the U.S. overall—was fairly straightforward.
With WTO membership, China emerged as the
world’s contract manufacturer and the beneficiary
of a flood of foreign manufacturing investment
initially aimed at delivering low-cost goods in
home markets and later at serving the emerging
China market.
Trade is still largely composed of equipment
and raw commodities flowing into China and finished
consumer and business goods flowing out.
But the more than $3 trillion in foreign exchange
reserves from that trade is funding a modernization
of China and its economy that is taking place
at impressive speed.
Bay Area architects are building high-rise office
towers, retail corridors and mixed-use
neighborhoods in Shanghai, Beijing, Shenzhen,
Hangzhou and a growing number of inland cities.
China’s core Internet architecture, government
and university computer networks, and the enterprise
software running many of its largest stateowned
banks and industrial companies originated
in Silicon Valley.
Early exchanges initiated by Bay Area lawyers,
judges and law schools assisted China in advancing
its system of civil and commercial law
and in modernizing its courts. Lawrence Berkeley
National Laboratory, alongside California utilities
and regulatory agencies, have provided training
and technical support in developing energy efficiency,
renewable energy and utility demand-side
management programs. Bay Area tech firms and
venture investors have funded some of China’s
most successful banks, technology firms, healthcare
providers and retailers.
Investment has been welcomed, but not without
conditions—ownership limits, joint venture
and local content requirements, and technology
transfer in exchange for market access—all
to ensure that domestic industries are modernized
and become competitive. Navigating this
landscape often involves a complex exchange, as
a mandatory local partner can easily become a
long-term competitor.
In recent years, significant business activity has
begun to flow in both directions. Chinese firms
have located in the Bay Area to be closer to research
and innovation clusters and to serve the
U.S. market. They have initiated M&A to achieve
scale and vertical integration, and they are investing
in technology incubators, extending the
science park model to Chinese and U.S. entrepreneurs
in STEM and life sciences fields.
In this chapter we will examine current crossborder
exchanges in key Bay Area business sectors,
along with future areas of growth potential.
ARCHITECTURE AND URBAN PLANNING
From Buildings to Towns
and Districts
China has been a major market for foreign architects
since the 1990s. Internationally renowned
firms not only bring innovative designs to city
skylines, but also lend cachet that raises lease
and occupancy rates. Bay Area architects and
planners additionally bring to the table expertise
in green design, achieving energy and environmental
efficiencies that, over time, more than pay
for themselves.
The Landscape
Foreign architectural firms typically compete at
the high end of the market on high visibility,
signature developments. China has embraced
western design practices, but has limited foreign
firms to preparing and providing design services
and lending aesthetic, structural, materials, energy
efficiency, spatial use and other expertise.
Completed and accepted design drawings are
handed off to “local design institutes” (LDIs) of
architects, construction engineers and building
code compliance specialists.
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Ties That Bind, 2014 Edition
Requested drawings may be only 50–75 percent
complete—compared to more detailed
plans submitted in the U.S.—allowing flexibility
for the LDIs to lock in a final design. A developer
may retain a representative of the foreign firm to
work with the LDI through the construction phase
or may terminate its relationship once drawings
are submitted. Foreign construction firms can
serve as general contractors, but the actual construction
work is subcontracted to local firms.
Lower overall labor costs and shorter lead
times required to break ground have resulted in a
highly advanced market, often incorporating new
building technologies that have not yet been
implemented in the U.S.
Because land is owned by the government,
public projects are awarded by governmentsponsored
competition. Private development projects
entail a “scheme gathering” solicitation to
design firms to prepare concepts. These are submitted
to “expert” panels that evaluate and rank
design concepts for creativity, relationship to context
and constructability. Top finalists receive stipends;
winning design firms have an opportunity
to negotiate to provide further design services.
A Volatile Market
Property development has been a key driver of
China’s economic growth: according to the Urban
Land Institute (ULI), the real estate sector accounts
for 13 percent of the country’s GDP; 80 percent of
development activity is in residential property.
China’s property market has been on a roller
coaster since the global downturn began in late
2007. At that time, property prices in major Chinese
cities fell by as much as 30 percent, and new
projects dried up as foreign and domestic investors
pulled money from managed funds and
cashed out shares in property developers.
The government’s $585 billion stimulus program,
with its major housing construction component,
helped to restore confidence and lure
investors and developers back into the market,
spurring a flood of land acquisition deals and
project proposals. The result, by 2009, was a
binge of overbuilding and reports of vacant,
underperforming or delayed projects, mainly in
the Tier 1 cities of Shanghai, Beijing, Shenzhen
and Guangzhou.
While office and retail construction had outpaced
demand, China’s financial markets remained
neither deep nor liquid, leaving individual investors
with few options beyond real estate or stocks.
They flooded into real estate, borrowing to buy
multiple homes and bidding up residential prices.
In the government’s view, the problem in both
cases is speculation: “hot money” flowing in from
overseas, distorting prices and crowding out domestic
investment; and, fueled by excessive bank
lending, individual investors driving home prices
and rents out of reach for most Chinese.
Beginning in 2010, new rules limited project
approvals, project financing and the formation
of project companies. These were followed by
tighter restrictions on foreigners investing in or
acquiring domestic real estate entities and on
foreign purchases and use of properties. In
2010, Chinese insurance firms were permitted to
allocate up to 5 percent of their holdings to real
estate, in an effort to encourage more stable,
long-term institutional investment.
Additional measures have subsequently been
put in place to cool the residential market: restrictions
on the number of units purchasers
could buy; higher minimum down payments on
second homes and luxury first homes, as well as
for first-time homebuyers; suspension of new
mortgage loans for non-local residents or for
purchases of third homes; and an increase in
mortgage interest rates. Despite a decline in
sales, foreign buyers continued to shore up
prices in larger cities, rushing to buy in anticipation
of an appreciating currency.
Demand for high-end office, large-scale retail
and government projects remained strong in the
major cities. But land and labor costs were rising,
and development sites were increasingly scarce.
Developers searching for yield turned their attention
to Tier 2 cities—Dalian, Tianjin, Chengdu,
Suzhou and Hangzhou—and beyond, to Qingdao,
Chongqing, Xiamen and Wuhan, where costs were
lower and investment and ownership rules were
less restrictive. The focus in these outlying areas
was residential and retail, followed by grade-A
office space and finally by hotels and logistics/distribution
facilities.
Local investors and developers jumped into the
market, supported by pan-Asian private equity,
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Key Industry Sectors
Chinese banks and insurers, and local governments
that saw new projects as ways to broaden
their revenue base through transfer taxes.
Results were mixed. Land expropriation for
development increasingly sparked corruption
claims and threatened public unrest. Average
apartment rents were 8–10 times the average
nationwide income in 2012 in many Chinese cities;
in Beijing and Shanghai the ratio approached
30 times the average. Mortgage defaults were on
the rise.
By 2011, second home mortgages required a
60 percent down payment and carried interest
rates of 110 percent; second homes sold within
five years of purchase were subject to high
transaction taxes. Pilot property tax programs
were introduced in Shanghai and Chongqing.
The city of Beijing established a five-year residency
requirement for buyers not holding a Beijing
hukou permanent residency registration and
limited the number of homes local and non-local
buyers can own.
Home prices fell in late 2011 by a cumulative
0.3 percent across 70 cities; investment fell nearly
4 percent. Office space under construction nationwide
fell 8.8 percent as projects were put on
hold or cancelled; residential floor space contracted
nearly 25 percent. China’s National Bureau
of Statistics reported a 54 percent year-onyear
drop in foreign fund investment in the China
property market in the first half of 2012.
Projects on the drawing boards for Tier 2 and
Tier 3 cities have fallen off sharply, as more
speculative proposals dried up. The shakeout has
left the mature office and retail segments in Tier 1
cities more or less intact but also growing more
slowly. Occurring as the economy was already
slowing, the economic effects have been unsettling,
impacting both property values and municipal
finances that are highly dependent on
land sales. Property markets turned up again in
2013, but concern with unsold inventories and a
potential asset bubble remain.
Foreign investors are slowly returning, but investments
are selective. In August 2012, for example,
the California Public Employees Retirement
System (CalPERS) announced a $530 million investment
in two new funds offered by ARA Asset
Management, part of Li Ka-Shing’s Cheung Kong
Group. The pension fund’s last China investment
was in 2007.
In August 2013, a Blackstone Group Asia-focused
real estate fund made a $322 million bid to
acquire Chinese property developer Tysan Holdings,
Ltd. A month earlier, Texas private-equity
firm Century Bridge Capital invested USD 44.4
million in a joint venture with Hong Kong-listed
property developer Coastal Greenland Ltd. to
build a residential project in Wuhan.
Bay Area Architects Ride Out the Storm
Even with volatility and a market slowdown in
2011–12, Bay Area architectural and urban planning
firms have seen their business in China grow.
“We were clearly in a highly speculative stage of
the real estate economy leading to 2008–09,”
recalls Gene Schnair, managing partner for the
San Francisco office of Skidmore, Owings &
Merrill LLP (SOM). “Opportunities for the most
part seemed random. The first generation of real
estate developers put up cash for their investments
because it was one of the few places beyond
a very limited equity market to invest.”
The move to Tier 2 and Tier 3 cities reflected
government policies and the trend toward mass
urbanization. “Government has to raise revenue
at the municipal level, and land transactions are
the most direct way to do that,” Schnair says. “To
maximize the value of development rights, cities
caught on to the fact that they need master plans
to create value. This spawned a whole cycle of
large-scale, mixed-use developments.”
Surviving stable projects outside the major cities
have tended to involve established developers
with strong government connections and support
and no strong public opposition. Schnair says SOM
benefitted from longstanding relationships with
major developers, following them as they moved
into Tier 2 and Tier 3 markets. But for the most
part, his firm has focused on Tier 1 projects.
Among these are the Ritz-Carlton Financial Street
Hotel, the U.S. Embassy, the China World Trade
Center, and the Poly International Plaza office
complex in Beijing; the Huawei Technologies Corporate
Campus and the Knowledge and Innovation
Community technology park in Shanghai; and
the 71-story solar and wind temperature-controlled
Pearl River Tower in Guangzhou.
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Ties That Bind, 2014 Edition
Poly International Plaza, Beijing
Source: SOM
San Francisco-based Gensler currently has 35
million square feet under construction in China—
equivalent to the entire financial district of San
Francisco—with another 35 million nearing construction.
A further 20 million square feet are in
the conceptual design stage.
Included are projects such as the Shanghai Tower,
the second tallest structure in the world, with an
even taller tower about to break ground in Suzhou.
The spiraling, wind-powered Shanghai Tower
is considered a model of sustainable construction
in China, having earned both LEED Gold and the
equivalent China Green Building Design Label
three-star ratings. Gensler clients include General
Motors, retailer Diesel, and Chinese headquarters
companies such as Tencent and ICBC Bank. Most
of these projects are in cities in China’s interior,
not Beijing or Shanghai, which may lead Gensler
to open an office in Chengdu.
The firm is working on master planning projects
ranging from individual blocks to a city-scale
100-square-kilometer site in Zhuhai. Gensler’s
Asia practice head Dan Winey notes that sustainability
and green design are in growing demand
and that 90 percent of the firm’s buildings in
China are either China three-star or LEED certified.
But the big answer to sustainability, he believes,
is in how you design cities. Shanghai Tower Source: Gensler
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Key Industry Sectors
Guangzhou Textile Industry & Trade Complex
With 300 employees in China now, and 500 expected
in the next few years, 80 percent of the
firm’s clients are Chinese companies. This is having
secondary payoffs, as Chinese clients are starting
to call on the firm’s services as they expand outside
of China: new projects include a 10,000-
square-foot office for Tencent in Palo Alto, and a
regional headquarters in Laos for ICBC Bank.
Steps taken by the Chinese government to
cool the property market focused on housing,
hitting the newer, more speculative projects
hardest. Jeffrey Heller, president of Heller Manus
Architects, said China accounted for two-thirds
of his firm’s business at the beginning of 2012; a
year later it was around half. “Suddenly everything
was on hold, going in slow motion; people
were slow to pay. I checked with colleagues;
everyone was in the same boat.”
San Francisco-based landscape architecture
firm SWA Group confirms the experience of other
firms—that China business provided a lifeline for
architecture, planning and design firms in the leadup
to and during the global downturn, but that
improving markets at home are leading to a rebalancing.
Since its establishment in 2010, SWA’s
Shanghai office has grown to thirty employees,
and during the recession China accounted for
more than 50 percent of its business. While
Source: Heller Manus Architects
committed to China, the firm is looking now to
take more advantage of domestic opportunities.
The shakeout has not been entirely negative;
many projects that fell by the wayside were neither
well-planned nor fully funded and ate up
time and resources with proposals that went nowhere.
“From our view, the ‘slowdown’ in China
validated our focus on working with seasoned
clients capable of supporting high quality development,”
says Carsten Voecker, a director of
Woods Bagot based in San Francisco. “We certainly
shared our colleagues’ concern, but ultimately
the new government policies have helped
to stabilize the market.”
Woods Bagot—with U.S. studios in San Francisco
and New York and China studios in Beijing,
Shanghai and Hong Kong—has designed a wide
range of projects in the region. The firm’s Beijing
projects alone include Sunshine Insurance CBD
headquarters; the Vanke Retail and Mixed-Use
Center; and the 1.5-million-square-foot, 790-foottall
mixed-use CBD Tower Z11. Other current projects
include Wanxiang Century Center, a threetower
mixed-use development in Hangzhou; the
master plan for the 900-acre China Southern Airport
City in Guangzhou; the master plan for Dalian
Harbour, a mixed use waterfront development in
the port city of Dalian; the award-winning master
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Ties That Bind, 2014 Edition
plan for Xiasha Eco Business Park in Hangzhou; the
Pinggu Eco-Resort in the Zhejiang province; and
GT Land’s Landmark Plaza East twin mixed-use
towers, each measuring 920-feet, in Guangzhou.
Woods Bagot’s global studio model also
supports U.S. clients in building their overseas
presence. The firm’s San Francisco and Hong
Kong studios have partnered with one highly
recognized company based in California to deliver
projects in China. High-level design work is
carried out in San Francisco in collaboration with
the client, while documentation and construction
administration is delivered from one of the
Woods Bagot local Chinese studios.
In Pursuit of Green
Bay Area firms bring specific expertise to the table
in bidding for China projects. The region is
strong in urban planning, with a focus on livable
communities and sustainable, green development.
Leadership in Energy and Environmental
Design (LEED) certification from the U.S. Green
Building Council (USGBC) carries cachet in China,
suggesting advanced design, materials and processes
that command higher sale and lease prices
while lowering overall operating costs.
LEED-certified building space amounting to
some 80 million square feet was completed in
China by the end of 2011—more than any other
country outside the U.S. The first LEED-certified
facility in China in 2006 was the $18 million
Suzhou manufacturing and design center for
Santa Cruz-based maker of Bluetooth headsets
Plantronics, designed and constructed by another
Bay Area firm, Bechtel Corp.
China’s own equivalent of LEED, the Green
Building Design Label three-star system launched
in 2006, has certified more than 200 mostly
government buildings. The Ministry of Housing
and Urban-Rural Development program is a
points-based rating system that offers developers
more flexibility than LEED to choose the
credits they want to pursue, with ratings in each
of six categories—land savings and outdoor
environment; energy savings; water savings;
materials savings; indoor environmental quality;
and operations and management—that range
from one to three stars.
Woods Bagot’s Carsten Voecker, with his special
interest in the design of high-performance
building systems, says that the comparatively
young China market is particularly exciting because
the rapid pace of change has encouraged
an openness to new ideas. “There is a more immediate
focus on finding the best solution and a
peer-review-based approvals system to support
innovation,” he explains. “Here, our more established
practices and relative conservatism have
made it harder to advance new approaches.”
Architects agree that working with the local design
institutes (LDIs) has not been a constraint, as
they have become increasingly sophisticated in
terms of design, and the LDI relationship is important
in the same way as the developer relationship
in navigating a volatile market.
Xiasha Eco Business Park, Hangshou
Source: Woods Bagot
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Key Industry Sectors
Government has also embraced clean technology
and energy conservation, as it faces
mounting demand from a growing urban middle
class to address poor air and water quality—much
of it from coal-fired utility plants and state-owned
factories. For the longer term, attention is focused
on the concept of “eco-cities” that feature
zero-energy buildings, zero-emissions transport,
recycled resources and sustainable development.
A 30-square-kilometer prototype city of 350,000,
a cooperative venture of China and Singapore, is
under construction outside Tianjin, with completion
scheduled for 2020.
Demand for master-planned commercial districts,
residential neighborhoods and new communities
has grown in recent years. Larger projects
need to address issues like transit, climate, energy
and water supplies, and open space.
Jeffrey Heller says that most master plan projects
are real and are going forward, especially
now that uncertainty over the 2013 government
transition has been resolved. For Heller-Manus,
Tier 2 cities are where the new opportunities are.
The firm began working in China in 2006, with an
emphasis on large, planned, sustainable projects,
including the China Automotive Technology &
Research Center in Tianjin; the Guangzhou International
Fashion Center; master planning for the
Guangzhou city center and business district; the
Xiangyun Island International Cruise Terminal in
northeast China; the Nansha Eco-City master plan
at the mouth of the Pearl River; and the Ulanhot
Hedong District urban design in inner Mongolia.
Steinberg Architects has a 60-year history in
the Bay Area, and played a leading role in the
development of Silicon Valley from what had
been mostly orchards. As the Santa Clara residential
market matured, the Steinberg Group
expanded throughout the Bay Area and later into
Southern California.
Rob Steinberg graduated from UC Berkeley,
joined his father’s firm in 1977 and took over as
president in 1994. His exposure to China came in
2007, just before the global downturn. “We had a
general awareness that China was a market we
should look at but we weren’t sure how to go
about it,” Steinberg recalls. Through architect
David Nieh, (formerly chief architect for the City
of San Jose, then director of SOM’s urban design
studio in Shanghai and later with Shui On Land),
Steinberg arranged a trip in 2008 that led to his
first China project—a 25-year master plan for the
175-acre City University in Hong Kong.
From there, an employee connected Steinberg
with his fellow Tsinghua University alumnus working
with a local design institute. That led to a dinner
meeting in Chengdu with the CEO of a major
Chinese development firm, Overseas Chinese
Town Group, who asked Steinberg to look over
some design drawings and offer his thoughts. Not
long after, Steinberg Architects was managing the
design for a 5-million-square-foot 5,000-unit residential
project in Chengdu.
From a cramped representative office in
Shanghai, Steinberg won the contract for a 150-
acre master plan for the city of Chengdu and two
mixed-use projects in downtown Shanghai. By
2011, Steinberg had 15 China projects in the
works. In early 2012, it began design for the
7,000-acre, 80 million square foot Changsha
Songya Hu residential/office/retail complex in
southern China, working with developers Songya
Lake Co. and Aptech. Steinberg Architects now
has a staff of 25 in Shanghai that is expected to
double over time. China accounts for about 20
percent of the firm’s total business.
Bay Area architectural and planning firms see a
new set of opportunities on the horizon, as Chinese
investment in businesses and property outside
China ramps up. So far, outbound investment
has been modest and has not extended to signature
projects, but that is expected to change.
When it does, the skill sets of local firms in pushing
the design envelope while navigating the complex
system of building codes and planning review will
be essential. And existing relationships with Chinese
clients, investors and developers will provide
a helpful competitive edge.
ENERGY/ENVIRONMENT
Small Steps Matter
China is second only to the U.S. as a consumer of
energy. With domestic consumption rising and
increased production of shale oil in the U.S.,
China is expected to become the world’s largest
oil importer by 2014. It is also the world’s largest
generator of CO2 emissions.
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Ties That Bind, 2014 Edition
Coal is a uniquely important issue in China. By
the end of the 11th Five-Year Plan in 2011, China
ranked first in coal production, with an output of
3.18 billion tons; first in hydropower generation,
with 230,000 megawatts (MW) of installed capacity;
and first in nuclear power, with 15 operating
plants and 26 more on the drawing boards with a
combined generating capacity of nearly 42,000
MW. China was the leader in wind generation,
with 47,000 grid-connected MW.
China boasts 90 percent energy self-sufficiency,
largely because of coal, which generates
77 percent of the country’s electricity and is the
leading fuel for heating and industrial production.
In addition, while urban residential use is banned,
coal and biomass are the principal fuels for heating
and cooking in rural areas.
Chinese coal demand has risen steadily since
2000, growing at about 6 percent annually. So
has mine output, growing from 1 billion tons in
2000 to 3.8 billion tons in 2012. In 2008, the government
shut down some of its mines for safety
or environmental violations. Coal shortages in
turn closed nearly 60 utility plants and led to
electricity rationing and outages. For the first
time, China became a net coal importer; imports
have increased each year since 2009, reaching
227 million tons in 2012. Similarly, oil imports
accounted for 57 percent of consumption in
China in 2011, up from 32 percent in 2000.
China sees coal as essential to its continued
economic development and its overall energy
security: oil exploration and drilling at home
involves foreign joint ventures, and imports are
vulnerable to geopolitics, supply disruptions
and price volatility in global markets. Coal is a
low-cost, plentiful, accessible, domestically
available energy source. It is also taking a toll,
however, on health and on air and water quality
across China and, because China burns more
coal than all other countries combined, on
global CO2 emissions.
As one of many indicators pointing to environmental
pollution as a source of political discontent
among Chinese citizens, a recent study by
MIT, Peking University, Tsinghua University and
Hebrew University of Jerusalem found that in
parts of China, life expectancy had been cut by
more than five years due to coal combustion.
Even if coal were not the dominant energy
source in China, explosive economic growth and
urbanization would be taking an environmental
toll. Residential and commercial buildings account
for about 20 percent of China’s total energy consumption.
China adds an average 1.7 billion
square meters of building space annually. Building
energy consumption increased by 150 percent
from 1996–2008, particularly in cities in the hot
summer/cold winter areas of China’s interior. An
estimated 20–25 billion square meters of urban
residential and government buildings will be constructed
over 2010–20.
Such dramatic growth has amplified the shortcomings
of China’s conventional energy infrastructure.
Notably, political uncertainty and “quality of
life” issues, including health concerns from
environmental degradation, are among the most
commonly cited factors driving an estimated
$225 billion in capital flight abroad in the 12-
month period to the end of September 2012.
Respiratory ailments are common in major cities,
particularly among children. In 2013, severe air
pollution in Beijing led the city to introduce new
regulations that shut down factories, limit vehicle
use, and suspend classes when conditions are
particularly bad. In October, heavy smog in Northeast
China forced the closure of all expressways
and a major airport due to poor visibility as well as
the suspension of primary and middle school
classes in Harbin as a health precaution. Visibility in
Harbin was down to 20 meters.
In the face of these pressures, China has embarked
in the past decade on a nationwide program
of energy restructuring, including heating,
cooling, window, lighting and insulation retrofits
for buildings and a heightened focus on sustainable
and green design principles. In part to address
growing environmental concerns, and in
part to create national industries that can penetrate
global markets, China is also aggressively
promoting the research and deployment of renewable
energy and electric vehicles.
China’s electric vehicle market is the world’s
fifth largest after Japan, the U.S., France and Germany.
Despite substantial government subsidies
for purchases of domestically-produced electric
vehicles (EVs), high costs have limited consumer
uptake. With central government encouragement,
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Key Industry Sectors
however, EV producers are aligning with local
governments to develop large-scale pilot programs
throughout the country.
The 12th Five-Year Plan includes an “all-ofthe-above”
energy diversification strategy that
caps annual coal consumption through 2015;
expands coal mitigation measures, from washing
and land reclamation at mines to liquefied
coal and methane capture technology;
mandates greater energy efficiency for industrial
plants and commercial buildings;
sets targets for non-fossil fuel as a share of
total energy consumption—11.4 percent in
2015, rising to 15 percent in 2020;
sets reduction targets for energy consumption
in 2015 at 16 percent below 2010 levels, and
for CO2 emissions at 17 percent below 2010
levels; and
creates new energy efficiency and conservation
standards.
Despite these initiatives, China’s reliance on
coal and other fossil fuel sources is unlikely to
change soon.
In September 2013, China took another step
to rein in its coal consumption, banning new coalfired
power plants in the vicinity of Beijing,
Shanghai and Guangzhou. But even as China
moves to cut coal’s share of primary energy consumption,
the absolute amount of coal burned
will continue to increase.
California companies, utilities, government
agencies, non-governmental organizations, entrepreneurs
and investors are involved at virtually all
levels in advising on and helping with implementation
of China’s Energy Development Plan—from
shale gas drilling joint ventures and consulting on
nuclear plant design, to start-ups offering new energy
metering and sensor technologies, to pilot
projects bringing cleaner, energy-efficient motors,
boilers and solar cookers to rural areas.
Conventional Energy
Chevron Corp. sold kerosene for lamps and
home heating in China as early as 1904, later
opening service stations and sales outlets in major
Chinese cities and marketing petroleum products
under the Caltex brand. It re-entered China
in 1979 as an offshore exploration and drilling
partner with China National Petroleum Corp. in
the Pearl River Mouth Basin of the South China
Sea, discovering oil in 1985 in the Huizhou oil
fields. Production began in 1990.
Today Chevron has production-sharing contracts
covering eight oil and gas exploration
blocks in China. In four of these, Chevron has an
operating interest—one for deepwater drilling in
the South China Sea, two signed in 2012 for
shallow-water blocks in the Pearl River Basin, and
a fourth onshore at the 487,000-acre Chuandongbei
gas field in Sichuan Province. The company
is developing two other fields in the area
and is building two gas processing plants with a
combined daily capacity of 740 million cubic feet
at a combined cost of $6.4 billion. First-phase
completion is scheduled for late 2013 as initial
exploratory wells are drilled.
In 2012, Chevron began exploratory drilling
for shale gas in the Qiannan Basin in southcentral
China, with additional drilling to commence
in 2013. It is also a 50 percent partner in
the CPChem polystyrene plant in Zhangjiagang,
which produces 100,000 metric tons of petrochemical
resin annually for use in manufacturing
plastics products.
San Francisco-based construction and engineering
firm Bechtel Corp. has offices in Beijing,
Shanghai, Shenzhen, Hong Kong and Taipei and
has been active in China since 1979 with more
than 80 projects. Its signature energy-related
project was managing construction of the $4.3
billion CSPC Nanhai Petrochemicals Project in
Huizhou, a CNOOC-Shell complex of 11 plants—
including an 800,000-ton annual capacity ethylene
cracker—completed in 2005.
In April 2012, Bechtel signed a consulting
agreement with the China Nuclear Power Engineering
Co. (CNPE) to provide training and
education in project management, as the government
moved to end its moratorium on new nuclear
plant approvals and complete inspections of existing
plants following the March 2011 Fukushima
plant meltdown in Japan. China has since restored
nuclear power to the mix of non-fossil fuel
energy sources, along with renewables, with a
target to generate 30 percent of the country’s
power by 2015.
Chinese energy firms, meanwhile, are eyeing
the fast-growing U.S. natural gas market: in
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Ties That Bind, 2014 Edition
February 2013, China Petroleum & Chemical
Corp. (Sinopec), Asia’s largest refiner, announced
it would pay $1.02 billion for half of Chesapeake
Energy Corp.’s 850,000-acre Mississippi Lime
shale reserves in Oklahoma. Sinopec had already
bought a third of Devon Energy’s interest in five
gas fields for $2.2 billion in January 2012. Sinochem
Group bought a stake in Pioneer Natural
Resources Co.’s Wolfcamp shale field assets in
Texas for $1.7 billion in January 2013.
Chinese clean energy producer ENN Group
Co. Ltd. announced in March 2013 a limited partnership
with CH4 Energy Corp. of Salt Lake City
(operating as Blu LNG) to build 50 natural gas
fueling stations along U.S. highways in its first
year. ENN already operates a network of similar
stations in China. The move is a “build it and they
will come” effort to meet projected future demand
in the long-haul trucking and fleet vehicle
markets across the nation, including California.
Efficiency and Conservation
In June 1987, Lawrence Berkeley National Laboratory
(LBNL) researchers Mark D. Levine and Bo
Adamson presented a paper, “Energy Use in
Buildings: The U.S. Experience and Lessons for
China,” at a joint U.S.-China symposium in Nanjing
sponsored and organized from the U.S. side
by the U.S. Department of Energy.
The report noted that commercial and residential
buildings accounted for 36 percent of total U.S.
energy consumption at the time; outlined potential
energy savings from better insulation, window
glazing, lighting and passive design, and more
efficient heating, cooling and appliances; discussed
policy options for encouraging adoption of
best practices, from new government standards to
rebates and low-interest loan programs; and
stressed, as a first step, the need for comprehensive
energy consumption data collection in Chinese
cities.
LBNL at that time already had a track record
advising Southeast Asian governments on energy
efficiency. But interest and projects growing
out of that initial presentation led Levine to
found a separate China Energy Group (CEG) at
the Lab in 1988, to manage joint research and
technical support projects with companion institutes
and government bodies in China. Today
CEG receives roughly a third of its funding from
each of three sources: government, mainly the
Department of Energy, Department of State and
the U.S. Environmental Protection Agency (EPA);
foundations and nongovernmental organizations,
in particular the San Francisco-based Energy
Foundation; and other sources such as inkind
gifts from private companies.
Energy conservation and efficiency have become
key components of Chinese policy regarding
not only energy production, but also the management
of economic growth and urbanization. This is
occurring as an emerging middle class and mass
migration from rural areas to cities is generating
major impacts in transportation, utility usage and
construction, making this a national priority. The air
quality impacts of energy use are receiving even
greater attention recently, and there are numerous
efforts to link improved energy efficiency with reduction
in local air pollutants.
LBNL’s research and consulting work has accordingly
expanded in recent years, helping to
build the policy framework and introduce technological
advances to support increased adoption
of energy efficiency. Some examples include
the following:
CEG supported the development of government
regulations for appliance energy efficiency
standards and labeling, testing manufacturer
claims and compliance, and improving
efficiency for over 30 consumer appliances.
CEG helped draft China’s building energy standards
in the 1990s. It has advised on building
codes in Shanghai and four cities in southern
China and has rolled out a pilot windows rating
and labeling program in Guangzhou.
The Group introduced the concept of negotiated
agreements through a pilot project which
led to China’s Top-1,000 (now Top-10,000)
Energy-Consuming Enterprises program.
The Group provides resources and technical
assistance for this program, including benchmarking
the performance of China's major
energy-consuming industries such as steel
and cement production.
Modeling tools developed by CEG enable
cement, steel, textile and process heating
firms to analyze relative environmental and
cost impacts of various strategies.
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Key Industry Sectors
The China Energy Group also provides advice
and training for the China Energy Conservation
and Environmental Protection (CECEP) group, a
state-owned enterprise charged with developing
conservation, emissions reduction and environmental
protection technologies and projects.
CECEP, with more than 170 subsidiaries and a
workforce of 40,000, oversees $3.7 billion in central
government investment in some 3,000 projects
in China.
In all, LBNL has over 50 active projects underway
in collaboration with China, involving future
low-emissions pathways, low-carbon eco-city
development, policies for low-carbon markets,
energy system planning and grid integration, low
emission and efficient industries, and low emission
and efficient buildings and equipment.
The China Energy Group’s U.S.-China Clean
Energy Research Center for Buildings Energy
Efficiency (CERC-BEE)—one of three centers
established at U.S. universities and national
laboratories—was launched in 2011 following
meetings between President Obama and Chinese
President Hu Jintao. The LBNL center is
specifically focused on building energy efficiency.
The two other centers, at the University
of West Virginia and the University of Michigan,
are devoted to research on clean coal and energy-efficient
vehicles, respectively.
LBNL has partnered with CalCEF, a non-profit
venture-funding group created to accelerate
cleantech breakthroughs to market, and with Cal-
Charge, a consortium of more than 30 batterytechnology
start-ups, to form a Joint Center for
Energy Storage and Research (JCESR). JCESR has
been approved as a U.S. Department of Energy
innovation hub, and CalCharge hopes to partner
with Chinese companies to manufacture lighter,
cheaper, longer-life vehicle and industrial batteries.
In a related effort, the Lab hosted a battery
technology workshop in China in April 2013, coinciding
with a China delegation led by Gov.
Jerry Brown, during which Fremont-based Tesla
Motors announced the opening of Beijing and
Shanghai dealerships for its line of high-performance
electric cars. As part of that delegation,
LBNL co-hosted a conference at Tsinghua University
on the “California Carbon-Free Economy,”
examining the effectiveness and implications of
California’s recently-adopted carbon trading program.
China currently has cooperative cap and
trade pilot programs with the European Union in
Beijing, Guangdong, Shenzhen and Tianjin, and it
plans a nationwide market as part of the 12th
Five-Year Plan.
In June 2013, following on the governor’s
trip, the California Air Resources Board (CARB)
signed a memorandum of understanding with
the Shenzhen Development and Reform Commission
(SDRC) to exchange information and
expand cooperation relating to their pilot cap
and trade programs. The collaboration is intended
to monitor research, share best practices
and build effective systems for data gathering,
emissions verification, market monitoring, compliance
and enforcement. As a further outgrowth
of the governor’s trip, and additional MOU was
signed in San Francisco in September 2013 with
the National Development and Reform Commission
for the sharing of low-carbon strategies and
the development of China-California joint ventures
for cleantech. The agreement is believed
to be the first on climate change between the
Chinese government and a U.S. state.
The Energy Foundation, a San Franciscobased
sustainable energy grantmaking entity
formed by major philanthropic foundations—
among them the William and Flora Hewlett Foundation,
the Kresge Foundation and the David and
Lucile Packard Foundation—launched Energy
Foundation China with Packard Foundation seed
funding. It currently has more than 100 partner
institutions in China, including research institutes,
think tanks, universities and government agencies,
as well as partners in California, including the
California Public Utilities Commission, the California
Energy Commission, and UC Davis.
The Energy Foundation has a representative office
in Beijing with sponsorship from the government’s
National Development and Reform Commission
(NDRC). Its Senior Policy Advisory Council
includes ministerial-level officials and it counts
ministry director-generals among its Dialogue
Partners. With a $29 million annual budget, Energy
Foundation China acts as a catalyst for capacity
building and sharing of best practices, supporting
initiatives in low-carbon development, transportation,
renewable energy, electric utilities, buildings,
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Ties That Bind, 2014 Edition
industry, environmental management and sustainable
cities. Program grantees advised China’s
State Council in drafting the stricter PM 2.5 particulate
matter emissions standards, to be implemented
first in major cities and nationwide by
2016. Prior to adoption of the standards in 2012,
the government had refused to even monitor fineparticle
emissions, which are associated with many
serious pollution-related health effects.
Some other projects in which Energy Foundation
China has been involved are
a Beijing Sustainable Development Center-
Tsinghua University program to promote clean
vehicle fuels and technology for use during
the 2008 Olympic Games in Beijing;
an initiative by the Chinese Academy for
Environmental Planning to develop
enforcement regulations for a national cap and
trade policy;
a 12-year collaboration with China National
Institute of Standards (CNIS) to develop and
implement energy efficiency standards for
appliances, lighting, water heaters, air
conditioning and home electronics; and
a detailed 2012 status report on building
energy efficiency in China, prepared by the
Global Buildings Performance Network in
cooperation with Chinese government,
university and professional experts.
According to Jiang Lin, the Energy Foundation’s
senior vice president for strategy and analysis,
the net annual energy savings projected once
the CNIS standards are fully implemented by
manufacturers nationwide will exceed the 18,000
MW of power generated by the Three Gorges
Dam in a year.
“Our primary goal is to help China transition to
a more sustainable energy future,” says Lin, who
believes that the most significant challenge facing
China today is mass urbanization. “Hundreds of
millions of people are moving from rural areas to
the cities. That means China has to build hundreds
of new cities. How those cities are built will have a
huge impact—in terms of congestion, of the carbon
footprint—on how livable those cities are.
We’re trying to bring a new pattern of urban design
and land use from the very beginning.”
Reflecting this, Energy Foundation China and
its environmental design partners have projects in
six Chinese cities, designing mixed-use, transitoriented
communities with dense street networks,
bicycle lanes and pedestrian walkways, short
commutes and mixed-use zoning, as an alternative
to the previous Chinese model of single-use
residential or commercial “super blocks.” The
Foundation has supported the design of a BRT
(bus rapid transit) project for Jinan City. The project
that is furthest along is in Kunming, the capital
of Yunnan province in southwest China, where
Berkeley-based Calthorpe Associates is developing
the master plan.
Lin sees huge opportunity in China’s commitment
to sustainable energy, carbon reduction,
conservation and environmental mitigation contained
in the 12th Five-Year Plan. In clean energy
alone, China has committed a total expenditure
of $473 billion over 2011–15. That suggests significant
business opportunities for overseas vendors
and for venture-funded energy technology
start-ups on both sides of the Pacific.
A San Francisco-based public-private partnership
formed in 2004, the China-U.S. Energy
Efficiency Alliance, with funding and technical
support from the U.S. Agency for International
Development (USAID) and the non-profit National
Resources Defense Council (NRDC), has negotiated
a series of memoranda of understanding with
Chinese government bodies. Among them are
MOUs with Hebei Province and Chongqing
Municipality to provide policy planning and
technical and training support for utility
demand-side management (DSM) programs,
and with Shanghai and Sichuan
Province for energy savings and emissions
reduction programs;
a framework agreement between the State
of California and Jiangsu Province to share
information and best practices and to collaborate
in the areas of emissions reduction,
renewable energy, energy efficiency and
environmental protection; and
a May 2013 MOU with the U.S. Department of
Commerce to jointly market U.S. energy efficiency
and smart building products and
services and increase access to the Chinese
market for related firms.
Alliance partners include California’s three
major utilities, Pacific Gas and Electric, Southern
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Key Industry Sectors
California Edison and San Diego Gas & Electric,
now a unit of Sempra Energy. The group also
includes venture investors, Honeywell, and niche
energy efficiency firms with active China strategies,
including:
Nexant, a global consulting firm headquartered
in San Francisco that specializes in advising
utility, energy, chemical and financial sector
clients on energy management, cleantech,
hedging, billing and other solutions. It has had
a presence in Shanghai for several years and
expanded into Beijing in 2012 through a
partnership with local petrochemical industry
consulting firm Chem1.
EnerNOC, a smart-grid designer and developer
specializing in utility demand response (DR)
programs to manage power consumption by
large commercial and residential customers
during peak demand surges. Based in Boston, it
has offices in San Francisco and Walnut Creek.
Opower, a company launched in San Francisco
in 2007 with Silicon Valley venture capital
funding. It now has 250 employees and
designs customer energy conservation
incentive programs for 75 U.S. utilities, using
behavior models and data analytics.
CLEANTECH
A Bright Future…Someday
On its surface, the public and commercial benefit
of clean technology is obvious: reduced energy
consumption, cleaner air and water, cost savings
through efficiency, and the slowing or arrest of
climate change and its impacts. Over time, the
transition to clean technology and processes is
widely accepted as a certainty.
The path forward has not been easy. Following
a period of expansion, market capitalization of
and venture investment in cleantech companies
worldwide fell sharply in 2012, as the industry
remains hostage to a range of external factors:
primary among these are fossil fuel prices on
world markets; government regulation, research
funding and subsidies; and global climate change
policy. Since 2008, cleantech companies in California
have been hit by a convergence of
global recession;
cuts to U.S. cleantech R&D spending following
the high-profile failures of firms accepting
federal stimulus money, such as Solyndra
Corp., Fisker Automotive and A123 Battery;
oil prices stabilizing in the $90–100 per barrel
range, and an expanded supply of domestic
natural gas which has driven down conventional
energy costs relative to renewables; and
inability to reach a global climate change consensus
that would capture the full competitive
cost of fossil fuel consumption through emissions
standards, cap-and-trade programs or
carbon taxes.
China and California find themselves at the
intersection of these trends, both shaping and
reacting to the global cleantech market. China is
driven by growing energy and environmental
concerns at home, and by government policies
designed to support Chinese emergence as a
global player in the renewable energy sector.
California, for its part, leads all other U.S. states
in advancing energy and climate policies and encouraging
renewables development; is the recipient
of the lion’s share of U.S. cleantech investment;
is the nation’s largest market for clean energy
technologies; and is the largest U.S. producer of
those technologies. Most of the state’s cleantech
companies and related investment are concentrated
in the Bay Area. This suggests potential
synergies. How California, the Bay Area and China
engage on these issues will have a significant impact
on both national and global trends.
Comparing investment, according to Bloomberg
New Energy Finance (BNEF), the U.S. claimed
the leading position in cleantech investment in
2011, totaling $48.1 billion versus China’s $45.5
billion. In 2012, China’s investment grew 20 percent
to $68 billion, while U.S. spending fell 37
percent to $35 billion. The U.S. (primarily California)
enjoys a large lead in venture investment,
but China benefits from much larger government
investment.
Many of these issues and opportunities are reflected
in the solar power sector. Reflecting the
growing importance of the California market,
China’s major producers of solar panels—
SunTech Power, Trina Solar and Yingli Green
Energy—established North American headquarters
in the Bay Area. Also operating in the region
are smaller producers such as Silevo, a Fremontbased
solar manufacturer with Chinese-American
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Ties That Bind, 2014 Edition
management and venture funding from the Chinese
affiliates of U.S. venture firms Madrone
Capital and Mayfield Fund. Silevo recently opened
its first production line in China, but eventually
plans to manufacture in the U.S.
China’s low-cost advantage in producing solar
and wind generation equipment has helped make
both large-scale generation projects and smallscale
residential installation cost competitive. It has
also, however, led to trade frictions with domestic
manufacturers, installers, and companies with sophisticated
solar panel and wind turbine technology.
At the heart of the debate is the allegation
that Chinese producers unfairly benefit from government
subsidies and are dumping panels (i.e.,
selling at below cost) in the United States.
Domestic stakeholders have been divided on
such complaints, with manufacturers feeling intense
competitive pressure (Chinese competition
was a factor in the high-profile demise of Bay
Area solar company Solyndra). Installers and consumers,
however, who have benefitted from falling
prices, see increased costs from higher tariffs
on Chinese imports negatively impacting what
has been a fast-growing market. Tariff opponents
and advocates of clean power cite the stimulative
effect of falling prices on solar deployments and
the substantial employment generated by the
domestic installment industry.
In October 2012, the U.S. Department of
Commerce sided with domestic solar panel
manufacturers on a 2011 complaint brought by an
Oregon-based subsidiary of German panel maker
Solar World Group. The complaint alleged that
Chinese manufacturers, with government support,
were dumping panels below cost on the U.S. market
in order to lock in market share in a nascent
growth industry. Commerce imposed antidumping
penalties of 18–32 percent on 61 major Chinese
companies who participated in the U.S. International
Trade Commission investigation (companies
declining to participate saw 250 percent penalties
imposed), and countervailing duties of 14–16 percent
on companies determined to be receiving
anticompetitive government subsidies.
In addition to being the major source of solar
panels installed in the U.S., China is also the main
supplier of solar panels in major European markets
including Germany, Italy, France, Spain, the U.K.
and Greece. Since 2011, many European solar
manufacturers have, like their counterparts in the
U.S., either failed or scaled back production, due
to a combination of weakening demand and Chinese
imports whose prices have fallen 75 percent
since 2009. In June 2013, the European Union
announced provisional tariffs on imported Chinese
panels, but in August reached a compromise under
which it would waive antidumping tariffs for
Chinese manufacturers who agreed to a schedule
of minimum prices and volume limits. The agreement
was confirmed in December 2013 with
participating Chinese exporters being exempted
from antidumping levies ranging from 27 to 64
percent. Chinese solar companies, faced with
overproduction and falling prices, are themselves
under financial pressure, with Suntech Power, the
world’s largest solar panel manufacturer declaring
bankruptcy in March 2013 and being absorbed by
two competitors in a rescue arranged by Jiangsu
Province, where all three firms are based. Other
companies are also facing large debt burdens.
Parallel developments are affecting wind generation.
In December 2012, Commerce upheld a
similar complaint from five domestic wind turbine
manufacturers—among them General Electric
Corp. and Siemens AG—against Chinese and
Vietnamese firms and imposed 46–71 percent
antidumping penalties plus 21–35 percent countervailing
duties. A federal grand jury in Wisconsin
indicted employees of Sinovel, China’s largest
wind turbine manufacturer, for conspiring to steal
electricity flow control software from Massachusetts-based
American Superconductor Corp.
(AMSC) in 2011. Following the theft, Sinovel refused
delivery of a $700 million order from
AMSC, resulting in a loss of 500 jobs at the firm.
Solar Flare
Trina Solar was launched in 1997 in Changzhou,
Jiangsu Province by CEO Jifan Gao, who had been
a solar panel installer in China in the early 1990s.
With its U.S. headquarters in the Bay Area, the
company entered the California market in 2009,
responding to the California Solar Initiative (CSI), a
rebate program for home and building owners
who install solar heating and electrical systems on
rooftops to displace power they would ordinarily
draw from utility grids. CSI rebates are in addition
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Key Industry Sectors
to federal tax credits amounting to 30 percent of
system acquisition and installation costs. As of
June 2013, California boasted more than 153,000
solar projects generating nearly 1,600 megawatts
(MW) of electric power statewide.
With market growth, the global market share
of China’s five largest module producers—Trina,
Suntech Power, Yingli Green Energy, Jinko Solar
and Canadian Solar—grew. Production also grew
rapidly, producing a worldwide glut that drove
solar panel prices down by 75 percent between
2009 and early 2013.
The effects of overproduction in China have
been aggravated by a falloff in demand from
Europe, which until recently accounted for nearly
60 percent of global demand. This occurred as
recession, tight credit and government austerity
have reduced subsidies and taken large projects
off the drawing boards. As demand from Europe
has slowed, China has increasingly focused on
the U.S. market and California in particular, where
policies to support cleantech deployment and
address climate change are most advanced.
China’s government is also seeking to stimulate
domestic demand, targeting 10,000 MW of new
installed base in 2013.
Trina president for the Americas Mark
Mendenhall remains hopeful about California,
which has more installed solar capacity than the
next five states combined. “Trina came to the
U.S. expecting that California would become one
of the leading areas of solar deployment in the
U.S., and it’s true,” he says, but another reason
was access to capital markets—from banks like
Wells Fargo and Bank of America—as well as
from venture capital, solar developers, green
funds and other sources.
California’s consistent policies to encourage
deployment of renewable energy—from the CSI
to 2006 legislation (AB 32) setting a target of reducing
California’s total greenhouse gas emissions
to 1990 levels by 2020 and mandating a
minimum percentage of utility electric power
generation from renewable sources—have provided
an incentive to project developers and
suppliers to invest in the California market. In
2010, voters upheld AB 32 against a repeal challenge,
Proposition 23, confirming the state’s
commitment to these policies.
At the end of 2012, Trina’s installed base in
the U.S. totaled approximately 3 GW, half of it in
California. Among its major projects are a 32-
acre, 5 MW project with nearly 30,000 panels in
Porterville for Southern California Edison (SCE),
completed in 2011; a 1.25 MW rooftop panel
project at Treasury Winery Estates near San Luis
Obispo, completed in 2010; and a 45 MW supply
agreement signed with SCE in 2010, involving
third-party installation of solar panels on commercial
rooftops in Southern California.
Trina is a supplier to third-party developers and
installers like Solar City, SunRun, Sungevity and
SunEdison (formerly chip manufacturer MEMC
Electronic Materials) that have projects nationwide,
including in California. It also draws on Silicon Valley
suppliers like National Semiconductor, Applied
Materials and QBotix of Menlo Park for integrated
circuits, materials and software tools that help optimize
panel performance. It also relies on highgrade
polysilicon from the U.S. in the manufacture
of PV cells for its modules.
Despite 18 percent antidumping duties and 16
percent countervailing duties which Trina begins
paying in 2013, Mendenhall—who left SunEdison
to take over Trina’s U.S. operations in 2012—says
the company can still compete in the U.S. market
through modular construction that offers installers
innovation, cost savings and convenience in a
ready-to-install package.
Small Solutions, Big Benefits in China
With funding tight and domestic markets growing
but constrained, California firms—including
small and medium-sized businesses with new
energy efficiency technologies and services—
have turned their attention to overseas markets,
including China. For its part in recent years,
China has begun to invest in U.S. energy technology
firms, even as the sector has cooled for
domestic investors.
Bridgelux, a Livermore industrial LED lighting
technology developer, saw opportunity in the
China market where the government has used
local government procurement and high tariffs on
imports to encourage broad deployment of LED.
In 2012, Kaistar Lighting (Xiamen) Co. invested $25
million in Bridgelux to accelerate R&D and production
of LED chip and packaging technology.
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Ties That Bind, 2014 Edition
The combination of Bridgelux technology and
Kaistar’s manufacturing cost advantage is expected
to expand the LED market in China and
help both companies compete against global
brands like GE and Philips.
MiaSole, a Santa Clara maker of copper indium
gallium selenide (CIGS) thin-film solar cells,
raised $550 million in venture funding over 2006–
12 from firms such as Kleiner Perkins, Bessemer
Ventures and VantagePoint. In 2012, MiaSole
became a casualty of the solar panel glut and
falling prices; it was acquired for $120 million by
Hanergy Holdings Group, a Chinese renewable
energy developer. Hanergy has pledged to
maintain MiaSole’s U.S. workforce of 100, pump
new investment into the company and increase
its sales in China.
Some firms have made inroads by bringing
technology to the table that brings added efficiency
and value to lower-cost Chinese production.
Petaluma-based Enphase Energy, launched
in 2006, makes microinverters that attach to individual
solar panels in an array, convert direct
current solar power to AC current that supplies
electricity grids, and automatically monitor and
optimize power output for each panel. Enphase
has an office in Shanghai and its microinverters
are embedded in panels made by Upsolar and
Hanwha SolarOne.
Advanced battery developer and manufacturer
Envia Systems, based in Newark, is on track to
bring to market in 2015 an electric car battery
with three times the efficiency of a Chevrolet Volt
battery while lowering the vehicle price by an
estimated $5,000. A recipient of federal stimulus
as well as venture funding, Envia’s strategic advantage
lies in patented nanocomposite battery
cell technology that increases storage capacity,
battery life and safety. The company holds 20
patents for its technology and counts among its
partners the U.S. Department of Energy, the Defense
Advanced Research Projects Agency and
General Motors. Its Newark headquarters includes
a materials innovation lab and a pilot production
facility for fabrication of battery materials;
cell prototyping and manufacturing are done in
Jiaxing, China.
Finding that optimum mix of technology at the
right price point is not always simple, especially
for smaller firms and start-ups. A case in point is
MakeSens, a Silicon Valley producer of energysaving
position, directional and current sensors,
most notably used to identify potential failures
and re-distribute lithium-ion battery power in
electric vehicles and smart grids. MakeSens principal
Dr. Xian (Sean) Yan says lithium-ion battery
and electric vehicle technology have enormous
potential, but the economics are daunting. The
unique characteristics of China’s market and
California’s policies, however, offer an opening.
“California is really way ahead in electric vehicles
and energy storage,” Yan explains. “California
policies and incentives are one reason we have
Tesla, for example.” But the jump from a laptop
with six cells to a Tesla sports car or S-model sedan
with 6,800 cells entails huge operating complexity
and cost. “The bottom line with battery
storage is price versus performance; if you can
balance the two, then the market really takes off.”
More than 20 million motorbikes and scooters
are sold each year in China, nearly all powered
until now by inefficient lead-acid batteries. In
some respects, 2012 saw a “perfect storm” in the
sector: sales still struggling since 2008 from the
global downturn were further hit by government
air quality restrictions on motorcycle use in large
cities; 70 percent of China’s 2,000 conventional
battery factories have been closed since 2011
due to lead poisoning concerns; and multiindustry
competition among autos, motorcycles
and electric vehicles (including e-bicycles and e-
scooters) has increased, as electric vehicle
manufacturers have expanded urban and rural
sales networks. Lithium-ion batteries are three
times as efficient in terms of storage capacity and
battery life, but are also three times the cost.
Made more efficient and reliable through sensor
technology and produced at the scale of China’s
market for motorbikes—as well as small fleet utility
vehicles or urban two-passenger smart cars—
this represents a sweet spot for his company and
for the broader industry.
Yan, originally from Shanghai, travels to China
frequently to meet with potential battery partners
and vehicle customers, and he has headed
CASPA delegations at conferences organized in
cooperation with its PRC counterpart, SEMI
China. Local governments in Tier 2 and Tier 3
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Key Industry Sectors
cities are eager to attract new technologies that
ultimately help build research clusters in already
established industry sectors such as automotive.
A more immediate challenge for companies
such as MakeSens is capital. Yan notes that
venture capital support for both cleantech and
for early-stage financing has ebbed in recent
years. For now, the company is getting by on
angel investor support as the hunt for Chinese
partners continues.
ZAP, a Santa Rosa supplier of electric utility
trucks and vans, motorcycles, scooters and ATVs
using the company’s advanced drive train and
battery technology, entered the China market in
2009 through a joint venture with Hangzhou electric
metering firm Holley Group and with financing
from Chinese VC investor Better World International.
The venture, ZAP Hangzhou, was established
to combine ZAP and Holley technology in
building fleet vehicles for the China market.
In January 2010 ZAP, with financing support
from Chinese cross-border VC firm Cathaya Capital
LLC, undertook a $36 million, 51 percent acquisition
of Zhejiang Jonway Automobile Co., Ltd., a
maker of electric cars, motorcycles and scooters.
The acquisition was completed in early 2011, and
the company was renamed ZAP Jonway. Its first
product was the E-380, a lithium-ion batterypowered
version of Jonway’s A380 three-door and
five-door small SUVs featuring ZAP’s electric drive
train. A lower-priced lead-acid battery model is
also available and a hybrid version is under development.
The acquisition substantially improved
ZAP’s access to the China market: the new vehicle
is sold through Jonway’s nationwide dealer network
and is eligible for government incentives
offered to electric car buyers.
In late 2010, ZAP signed an agreement with the
city of Shanghai to supply battery swap, charging
and maintenance facilities in the Yangpu District.
ZAP also agreed to develop a pilot Electric Vehicle
Eco-City program, deploying its vehicles in
Yangpu’s transit shuttle, taxi and government
vehicle fleets. In 2012, ZAP Jonway received $12.7
million in dealership financing from China
Everbright Bank and won China National Grid approval
for its E380-S battery-swap model vehicle to
be used in Hangzhou taxis and leased commercial
vehicles as part of a fast-swap pilot program.
BANKING/FINANCE
Slow Money
China’s banking market has more than $18 trillion
in total assets, $13 trillion in deposits and $9.3
trillion in loans. A 2011 report by PwC estimates
that China will overtake the U.S. as the world’s
largest banking market by 2023. Foreign banks,
however, are not sharing in the prosperity.
Overseas banks in China have invested more
than $60 billion in domestic banks, branch networks,
technology, branding and training. As of
mid-2012, Bloomberg estimated those 181 banks
from 45 countries earned back a combined $10
billion, held 1.6 percent of deposits and made 1.7
percent of loans from only 387 of the country’s
67,000 bank branches. Three foreign banks—
HSBC, Standard Chartered and Citi—account for
more than 230 of those branches.
Barriers to market entry are considerable and
have changed little in more than a decade. Foreign
banks must have at least $10 billion in assets
and maintain a representative office for two
years before they can incorporate and obtain a
banking license. They are limited in the number
and location of branches they may open each
year and must operate for three years—two of
those years showing a profit—before they can
offer a full range of local currency banking services
on par with domestic competitors. Reviews
and approvals at each step can add months or
years to the process.
Foreign bank loan portfolio value may not exceed
75 percent of capitalization; with deposits
constrained by branch limits, so are lending capacity
and market share unless banks recapitalize
internally. Regulatory barriers have delayed approvals
to issue RMB credit and debit cards, distribute
mutual funds, set up trust funds and serve
as custodians of investment accounts. Until banks
can offer full local currency services, they are effectively
denied access to state-owned enterprises,
wealthy private banking clients and other key customer
segments.
What is left for the banks has largely been a
mix of offshore and approved onshore dollardenominated
loans and deposits, Chinese offshore
corporate and private banking, and business
advisory services.
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Ties That Bind, 2014 Edition
Do You Know Where Your Money Is?
It should be noted that there is logic to the regulations
beyond simply protecting domestic banks
from competition. Slower GDP growth, lending
excesses over successive property and commodity
bubbles, and state-directed lending to SOEs
and local governments have left major Chinese
banks exposed.
Local government debt alone, much of it held
by Chinese banks, is believed to total $1.7 trillion.
Total non-performing bank loans are estimated at
$73 billion. Much of the bad debt is in local government
financing vehicles (LGFVs), instruments
first introduced by China Development Bank,
which lends for public infrastructure development.
Local governments have little autonomy to raise
taxes to finance public works. LGFVs create an
incentive to seize land, collateralize it, then borrow
against it to fund large projects. Many projects—
housing, office towers, stadiums—increase land
values but may not generate sufficient revenue to
repay debt. This creates pressure to seize even
more land to pay the interest and borrow against
that to build more, in a vicious cycle.
Banks, under government instructions to roll
over this debt, have rushed to raise fresh capital
through offshore debt and share listings and
through securitization of troubled loans into highyield
“wealth management products” (WMPs)
sold through unregulated pools.
China’s shadow financial system is significant—as
much as $4.8 trillion at the end of 2012,
according to an April 2013 San Francisco Federal
Reserve report, equivalent to 57 percent of GDP
and 31 percent of total bank assets. Shadow finance
may include mortgages from trust companies
or brokerages, small business loans from
SOEs, and WMPs offered by trust companies,
insurers, private equity firms or brokerages as
short-term investments with higher interest rates
than banks can pay. Much of this business is ultimately
financed with money initially borrowed
from the banks.
The shadow banking system has grown 34
percent annually, adding leverage and risk to the
formal system. In June 2013, the People’s Bank of
China tightened the money supply, withholding
RMB 2 billion ($325 million) from the market in a
signal to banks that it would no longer support
lending at unsustainable levels; short term interbank
rates rose 200 basis points in a week.
In such an environment, government caution
about further market opening is not surprising.
While foreign banks have limited their exposure
from ownership positions, they are also reassessing
their strategies and carving out geographic or
service niches for the long term, either alone or
through tie-ins with Chinese banks.
Bay Area Banking Flows
San Francisco-based Wells Fargo Bank has two
branches, in Shanghai and Beijing, and offers
remittance services through an affiliation with
Agricultural Bank of China. In 2010, Wells bought
out HSBC’s remaining interest in their joint Wells
Fargo HSBC Trade Bank venture, which had operated
since 1995. The subsidiary facilitates
trade transactions at either end with letter of
credit, bankers’ acceptance, receivables financing,
documentary collection, foreign exchange
and other services.
Bank of America’s Asia-Pacific operations
activities, with 27,000 employees, are headquartered
in Hong Kong. Even with growth
slowing, the bank sees opportunities in China,
particularly in serving mid-market U.S. companies
with operations in China. Activity by Chinese
companies that are expanding internationally is
also increasing. The bank has offices in Beijing,
Shanghai and Guangzhou serving corporate
clients, but no retail branches.
Silicon Valley Bank (SVB), headquartered in
Santa Clara, holds a unique position in China due
to its technology specialization and strong venture/private
equity client base. SVB became active
in China in 1999, organizing visiting delegations,
hosting seminars and arranging introductions in
both directions. It opened Shanghai and Beijing
subsidiary offices in 2005 and 2010, respectively,
and received its license in 2011, enabling it to
handle onshore dollar-based transactions.
SVB has a stake in a Hangzhou loan guaranty
corporation and manages two local renminbi
funds for the Yangpu District in Shanghai. In
2012, it formed a joint venture bank—SPD Silicon
Valley Bank—with Shanghai Pudong Development
Bank, the first joint venture bank to obtain a
license in 15 years.
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Key Industry Sectors
“We need to work in China in renminbi; that’s
the holy grail for foreign banks,” says SVB chairman
Ken Wilcox, noting that 95 percent of tech
industry business in China is done in renminbi.
“For China, it’s all about the banks’ ability to finance
innovation. There are as many as 2,000 VCs
in China today. Government plays a role in all of
them, but much of the investment is misallocated.”
Not enough attention is paid to business model
innovation and sound management, Wilcox says,
and that has worked to SVB’s advantage.
In addition to providing specialized financing
and trade-related services for the cleantech, life
sciences and venture/private equity sectors, SVB
also has developed a specialization in the wine
industry, representing more than 300 West Coast
wineries in California, Oregon and Washington.
Bank of Tokyo-Mitsubishi UFJ (BTMU) has
been active in China since 1980. It has 16
branches in Tier 1 and Tier 2 cities and a China
workforce of 2,400. The scale and scope of its
activities has helped its U.S. subsidiary, Union
Bank, land China-related business on both sides
of the Pacific.
In 2009, Union Bank created a Global Business
Coordination Unit to leverage its California presence
and BTMU’s China network. In addition to
traditional trade finance and foreign exchange
services, the new unit works with BTMU China to
offer to cross-border businesses in-country credit,
cash management, and investment solutions, as
well as international RMB-denominated trade
settlement and currency hedging instruments
both onshore and offshore via the Hong Kong
CNH market.
Union Bank senior vice president and global
business manager Bob Garrett sees enormous
opportunities in both directions. “Anyone who
makes things or provides services in California
either has a China strategy or is thinking about
one; they’re looking to make an acquisition, open
a sales office, or access manufacturing partners or
source materials,” he says. “People went to China
originally as an export platform, but much of the
foreign direct investment we see today is aimed
at selling into the China market itself.”
Garrett observes that many businesses with
the resources and track record to succeed in
China are already there. However, small California
firms with specialized products and services being
promoted by the current Five-Year Plan—in
healthcare, telecom, IT, cleantech and environmental
mitigation—will stand to benefit. For Chinese
companies and investors looking to expand
into new overseas markets, Chinese banks do not
yet have the global reach, expertise or range of
services to assist much of that business, he says.
Garrett adds that investment capital flows from
China represent “a huge opportunity for California.
It’s going to come as Chinese firms take their
businesses global, and they’ll be looking for the
biggest markets, where the culture is the same or
close to theirs. It’s California’s to win.”
Hong Kong and Taiwan banks have a long
history in the Bay Area, and now PRC banks are
making an initial approach. Industrial and Commercial
Bank of China (ICBC) has five Bay Area
retail branches—in San Francisco, Oakland and
South San Francisco—through its 80 percent interest
in Bank of East Asia, a Hong Kong-owned
bank chartered in the U.S. The ICBC application
was approved in May 2012 after lengthy U.S.
Federal Reserve and Federal Deposit Insurance
Corp. reviews, since it entails retail banking and
thus federally insured deposits.
The Bank of Communications, after a threeyear
wait, has been approved to open a second
wholesale branch outside New York, in downtown
San Francisco. The bank offers business-tobusiness
services aimed primarily at Chinese and
Chinese-American clients in the Bay Area.
Credit Cards: A Charged Issue
Despite staggering growth in the past decade,
credit card penetration in China remains relatively
low. McKinsey Global Institute estimated that the
number of credit cards issued in China grew from
11 million in 2004 to 124 million in 2008, and
People’s Bank of China data for 2011 placed the
number at 268 million; 42 percent of urban residents
told a 2011 survey they had at least one
credit card.
But those numbers can be deceptive in terms of
actual revenue. With a near 50 percent savings
rate, a tendency to pay off outstanding balances
within the month, and household debt already
high from big-ticket home mortgage, medical and
education expenses, discretionary spending on
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Ties That Bind, 2014 Edition
credit cards in China has been limited. That, in
turn, has also kept merchant fees low. Major
discretionary card purchases are often made
overseas: credit card purchases made abroad by
Chinese tourists have grown sharply; U.S. purchases
have increased more than 30 percent
annually for most of the past decade.
Card issuers such as Visa, MasterCard and
American Express normally earn payment processing
fees, but in China all card issuers must use a
single domestic payment processor, China Union-
Pay (CUP) for yuan-denominated transactions. CUP
was founded in 2002 by 85 Chinese banks under
the auspices of China’s State Council and the People’s
Bank of China. All merchants and ATM machines
in China are required to accept CUP credit
and debit cards; CUP is the world’s largest issuer
of credit and debit cards, with 2.9 billion cards in
circulation (Visa is number two with 2.3 billion), and
the third largest in terms of transaction value.
Responding to a U.S. complaint, the WTO
ruled in July 2012 that China must end CUP’s
effective monopoly on payment processing, but it
determined that foreign credit/debit card issuers
can operate in China through co-branded partnerships
with Chinese banks, and it upheld
China’s right to regulate cross-border clearance
of payments into China. To date, China has neither
challenged the ruling nor outlined specific
steps or a time frame for reform.
Visa, headquartered in Foster City, became
the first international card brand accepted in
China when Bank of China’s Guangdong branch
began providing cash service in 1979 to Visa
cardholder customers with Hong Kong’s Bank of
East Asia. The first Visa card in China was issued
by Bank of China in 1987.
The firm set up representative offices in Beijing
and Shanghai in 1993 and 1996, respectively.
Guangdong Development Bank issued the first
RMB-denominated Visa card in China in 1995;
ICBC issued the first dual-currency card in 1996.
Visa was a technical consultant to China’s Golden
Card Project, the precursor to China UnionPay.
CUP became a Visa principal member in 2002
and the two have been collaborators and competitors
since.
Working with 23 domestic and international
financial institutions in China, Visa develops
branded cards; works with client banks to expand
its acceptance network through installation of
point-of-sale terminals and ATMs; develops
credit, debit and prepaid options for consumers,
as well as corporate card products; promotes
security in the payment card industry and fights
bankcard fraud; and partners with government
and trade groups on China tourism promotion. It
has played a leading role in the transition from
magnetic stripe to embedded-chip ‘EMV’ cards,
and in 2008 it launched the first Visa ‘contactless’
card product in China—the Peony-Parkson Pay-
Wave card, a tie-in with Beijing Parkson Shopping
Center and ICBC.
Visa is hoping these long-term investments will
be rewarded over time in a more open credit
card issuance and payment clearance market,
particularly as the anticipated easing of currency
controls goes forward.
Hong Kong—The Financial Intermediary
China is pursuing incremental financial reform—on
its own timetable. It has a stated interest
in internationalizing its currency and opening
its markets. As an interim step, it is taking full
advantage of Hong Kong’s status as a special
administrative region of the country since the end
of British colonial rule in 1997, using it as a laboratory
for financial modernization.
Under the “one-country-two-systems” arrangement
guaranteed through 2047, Hong Kong’s
common law system, predictable regulatory
framework and simple tax structure (16.5 percent
profits tax; salaries tax capped at 15 percent; no
sales, dividend/interest or capital gains taxes) have
supported its continuing role as a major global
financial center and China gateway, with
over 200 licensed banks and deposit-taking
companies, plus some 61 overseas bank representative
offices from 35 countries and a
daily interbank turnover of HKD 212.4 billion
(as of the end of August 2013);
one of the world’s major insurance centers,
with 154 authorized insurance companies of
which 71 (46 percent) are from 20 overseas
countries or mainland China;
an offshore RMB center handling crossborder
trade settlement of some RMB 2,600
billion in 2012; in the first eight months of
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Key Industry Sectors
2013, RMB trade settlement handled through
banks in Hong Kong amounted to RMB 2,285
billion, representing a year-on-year increase
of 35 percent;
Asia’s second largest stock market, with more
than 1,570 listed companies (including close
to 750 mainland enterprises) with a combined
market capitalization of $2.8 trillion as of
August 2013;
Asia’s second largest ETF market in turnover,
with USD 85 billion traded in the first eight
months of 2013, 61 percent in mainland shares;
a liquid debt market of USD 261 billion in outstanding
debt securities (at the end of 2012)
with an average UAD 2.4 billion traded daily,
plus over 1,840 authorized unit trusts and
mutual funds;
an active market for initial public offerings
(IPOs), with USD 33 billion raised in 2011
(although 2012 IPOs were off by two-thirds,
raising USD 12 billion); and
a leading international fund management hub,
with USD 1.1 trillion in assets under management
in 2012.
Investment options are scarce in China, because
of the tendency to create asset bubbles and
a relative inability to assess and manage risk. Pentup
demand for liquidity and higher yield is putting
pressure on China to liberalize its financial markets.
In this context, Hong Kong has provided the
mainland with a window into markets for ETFs,
index funds, options, futures and derivatives and
offers foreigners a platform to play the China
market through H shares (mainland-incorporated
firms listing in Hong Kong) and P-chip shares
(Chinese companies incorporated offshore and
listed in China). These shares permit VC and private
equity investors to buy stakes in PRC companies,
structure IPOs or merge firms, and then
exit and repatriate profits.
Similarly, Hong Kong was the test location beginning
in 2007 for issuance of “dim sum bonds,”
yuan-denominated bonds sold by the Chinese
government, banks and companies to offshore
investors. From its first year when RMB 10 billion
in bonds were issued, the total outstanding
reached RMB 292 billion by September 2013.
Hong Kong also benefitted from the gradual
introduction of cross-border trade settlement in
RMB, first allowed for five provinces in 2009, expanded
to 20 in 2010, and permitted nationwide
in 2011. Settlement volume by Hong Kong banks
in the first eight months of 2013 reached RMB
2,285 billion. That, in turn, has contributed to a
total of RMB 857 billion in accumulated offshore
deposits and certificates of deposit in banks in
Hong Kong as of August 2013—big business for
foreign banks registered in Hong Kong.
But how long will this situation last? China is
internationalizing its currency, but the process is
gradual and closely managed. This is benefitting
Hong Kong, but competition is coming.
Partners Across the Border?
The next phase of the experiment may take place
at Qianhai Bay, a 15-square-kilometer planned
development in Shenzhen. Qianhai is to be established
as a finance, information and logistics
hub offering a low 15 percent corporate tax and
concessionary personal income taxes to attract
talent—a profile similar to Hong Kong, but with
an important added feature.
China’s National Development Reform Council
(NDRC) has invited large mainland and foreign
financial institutions and fund managers to
locate within Qianhai, permitting them to raise
renminbi offshore—in Hong Kong—to invest on
the mainland. Companies registered in Qianhai
will be able to issue bonds and obtain loans via
Hong Kong.
Qianhai is the government’s third attempt at a
special zone enabling currency internationalization,
following programs launched and later discontinued
in Wenzhou and Tianjin. At its heart are eased
restrictions on offshore investment by institutions
and wealthy individuals as Qualified Domestic Institutional
Investors (QDIIs) and Qualified Foreign
Institutional Investors (QFIIs). The first of the new
and revised rules were issued in early 2013. The
challenge for regulators is to set thresholds that
attract large financial institutions, but also to set
limits that effectively manage risk.
Shanghai also sees its role as a global finance
hub expanding in tandem with easing of currency
controls. Settlement of trade transactions in
Shanghai dates back to 1842, and the original
Shanghai Stock Exchange opened in 1891. The
Exchange closed following the 1949 revolution
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Ties That Bind, 2014 Edition
and was re-established in 1990. In 2012, the National
Development and Reform Commission
(NDRC) released a long-term development plan
for Shanghai that includes development of an expanded
Shanghai Financial Center. By 2015, China
plans to launch an international board on the
Shanghai Stock Exchange to allow overseas company
listings and trading in foreign stocks, derivatives,
bonds and gold. The 2013 launch of a 28-
square-kilometer free trade zone in greater Shanghai
will, among other things, facilitate cross-border
settlement of yuan transactions and expand the
currency’s use in trade, finance and insurance.
In October 2013, the government took a further
step toward internationalizing the yuan by announcing
during a visit by Vice Premier Ma Kai that
London will become the first major trading hub for
Chinese currency outside Asia.
All of this will necessitate conformity with international
standards and practices in law, taxation,
and supervision. A 2011 Brookings Institution
report suggested that Shanghai’s success will
depend on a broader offer of financial products;
wider global use of the renminbi; an expanded
“soft” infrastructure of related services; and a
liberalized commercial law framework for structuring
and adjudicating transactions. In a 2012
PwC survey, foreign banks stressed two overarching
prerequisites: meaningful currency and
interest rate liberalization.
MOBILE/INTERNET
Everything Is Interconnected
It is much more difficult today than in the past to
make distinctions among tech market segments—computing,
networks, mobile and wireline
broadband, data storage and analytics, social
media, entertainment—as the lines between
them become more and more blurred. All are
increasingly part of a single set of tools that
work in various combinations to serve particular
markets. The trends shaping the tech sector
today include the following:
The cost of computing—both on the hardware
side and the software side—has fallen sharply,
even as devices become smaller and more powerful,
and as computing finds new applications
in cars, appliances, smart buildings, manufacturing,
power generation and agriculture.
Computing has moved from the desktop to
mobile devices and the cloud, and as banking,
retail, entertainment, travel and government
services become available online, on
demand, on a 24/7 basis via multiple channels,
brick-and-mortar businesses have seen
wide-scale disruption.
Big data, social media and mobile payments
are creating rich personal and brand-driven
business ecosystems that keep users connected
in a real-time feedback loop of
marketing data.
In China, as in most emerging economies,
mobile technology has leapfrogged an inefficient
national wireline telephone monopoly. China’s
online markets are growing exponentially: data
storage and management firm Network Appliances
estimates annual turnover in China’s data
storage and management market at $2 billion,
among the world’s largest. Alibaba expects transactions
hosted by its main online shopping sites,
Taobao and Tmall, to reach $473 billion in the
next five years. According to the Boston Consulting
Group, online retail sales in China are
projected to triple to more than $360 billion by
2015, overtaking the U.S. as the world’s largest
online market.
It Starts with a Phone Call
China’s state-owned telecom providers are at the
heart of the country’s Internet architecture. In
1999, the monopoly wireline phone company,
China Telecom, was broken up, its assets in 10
northern provinces given to China Netcom (now
China Unicom), formed in 1994 as a wireless pager
and mobile provider. China Mobile, launched in
1997, emerged as a nationwide wireless provider
after the China Telecom breakup.
As demand for more sophisticated mobile services
has grown, China Mobile has often struggled
to innovate. Introduction of the 3G smartphone
in Tier 1 cities was initially handed off to
China Telecom and China Unicom in 2009. China
Mobile remains the baseline national provider of
2G rural services and has steadily expanded its
3G phone and data offerings. It is the world’s
largest mobile provider, with 745 million subscribers;
in Q1 2013, it had 114 million 3G customers,
up from 60 million a year earlier.
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Key Industry Sectors
China Telecom and China Unicom operate on
conventional CDMA standards prevalent in the
U.S. China Mobile has gradually migrated from
the European GSM mobile standard, to a new,
distinctly Chinese version TD-SCDMA, that focuses
on data capacity rather than voice call clarity.
This is significant for handset and chipset
makers seeking access to China Mobile’s customer
base.
Apple’s early decision to adopt the GSM
standard for the iPhone, with an eye toward the
high-end European market, delayed the phone’s
release in China, but the firm did obtain a license
to offer the iPhone on China Mobile’s
network, with rollout in late 2013. By providing
access to its more than 700 million subscribers,
the partnership with China Mobile, which involves
the lower-cost iPhone 5, may improve
Apple’s market share (5 percent), which has
been declining relative to competitors such as
Samsung (18 percent), Lenovo (12 percent),
Huawei (9 percent) and fast-growing Xiaomi (5
percent). Apple’s high cost—$815 for an iPhone
5 compared to an average smartphone cost of
$200—has been a factor that the lower-cost
model offered through China Mobile may also
help to address. Apple’s current customers are
concentrated in affluent cities such as Beijing
and Shanghai, while the fastest market growth is
now in smaller and inland cities where China
Mobile enjoys a strong position. Consumer
trade-ups in those cities, from older feature
phones to smartphones, offer an opportunity for
Apple—if it can hit the right price points.
In the meantime, Google’s Android operating
system dominates in China, with just over 70 percent
of smartphone market share as of July 2013,
up nearly 9 percent from a year earlier. Prices for
3G smartphones are falling sharply, to as little as
$99, and Android powers most of the low-cost
phones made by Chinese producers like Huawei,
ZTE, Lenovo and Xiaomi.
As of April 2013, China’s Ministry of Industry
and Information Technology (MIIT) reported 1.16
billion mobile phone users nationwide, up 13
percent year-on-year. In the same time, 3G subscribers
grew by 84 percent to 293.1 million and
are projected to reach 375–400 million by year
end 2013—still at best a 40 percent market
penetration. Most Chinese are still on 2G feature
phones without Internet capability.
Industry analyst Canalys estimates that 30 percent
of the 840 million mobile phones sold
worldwide in 2013—some 240 million—will be
sold in China. Research firm IDC estimates that
China accounted for 26.5 percent of global
smartphone sales in 2012, passing the U.S. as the
world’s largest smartphone market.
The total number of people online in China—
via wireline or mobile—is about 560 million, a 42
percent penetration. Most access the Internet on
phones, while more expensive personal computers
are used in cafes and workplaces.
Much of China’s original Internet infrastructure
was developed by major Silicon Valley companies
like Cisco Systems, Sun Microsystems and Oracle.
Equipment and software were installed within
government agencies, SOEs and universities at
concessionary prices in the 1980s and 1990s, in
the hope of building early ecosystems of users
that would generate repeat contract business
over time.
Many of China’s premier Internet companies
also have roots in Silicon Valley. Baidu, the
leading Chinese search portal, was founded in
1999 by Robin Li, who previously headed search
engine development at Infoseek in Sunnyvale,
and Eric Xu, a UC Berkeley graduate in biochemistry
with extensive Valley connections.
Web portals Sina Corp. and Sohu.com received
early venture funding from Valley investors, as
did Internet portal Tencent, online payment
provider YeePay, social media site 51.com, applications
developer NetEase, online travel service
Ctrip, and game designers Shanda Interactive
and The9.
Global web portal Yahoo! and search firm
Google got off to successful starts in China, but
stalled over freedom of speech and censorship
issues. Yahoo! complied with Chinese law in
2005 and provided the government with IP address
information on dissidents which led to
their arrests and imprisonment; Google agreed
to filter politically sensitive key search terms
from its system in 2006. Both incidents proved
damaging. In 2013, Yahoo! Mail was closed
down in China, after falling to a 2 percent market
share.
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Ties That Bind, 2014 Edition
China’s Online Search Traffic Market Share, September 2013
70%
60%
50%
Traffic Share in Page Views
Traffic Share in Unique Visits
40%
30%
20%
10%
0
Baidu
Qihoo 360
(So.com)
Sogou
Soso
Google
Bing
Yahoo
Youdao
Others
Source: Marbridge Consulting, Beijing
Yahoo! had been instrumental in the launch
of business-to-business (B2B) search engine
Alibaba.com, and in the face of political and
market challenges eventually traded its China
operations and $1 billion for a 40 percent stake in
Alibaba, which has since bought back half of that
position. The transaction netted Yahoo! $7.6
billion; its remaining stake in Alibaba continues to
account for a significant share of Yahoo’s capital
value. Alibaba is rapidly expanding its reach
beyond B2B, to include consumer transactions and
finance: its Tmall claims 70,000 online storefronts,
and in 2012 it’s 11.11 Shopping Festival processed
$2.5 billion in transactions in 24 hours, more than
Black Friday and Cyber Monday combined.
A 2009 cyber attack on Gmail accounts of
Chinese human rights activists in 2009, presumably
at government direction, led Google to publicly
announce that it would no longer censor its
search results. In March 2010, the company announced
that it would shut down its Google.cn
site and offer unfiltered China search via its Hong
Kong site Google.hk, while keeping its mainland
R&D center and sales presence. In December
2011, Google broke ground on a 2.7-acre, $100
million data center at the Tseung Kwan O Industrial
Estate in Hong Kong. It has since entered a
partnership to provide filtered search for
mainland portal Qihoo 360.
Hong Kong is aggressively marketing itself as
a location for secure data center operations to
serve the mainland market; Apple has been
scouting locations for its first offshore data center
in Hong Kong, targeted to open in 2015. Bay
Area suppliers such as San Jose-based data storage
media manufacturer Microdia and Arkologic
Ltd., a Fremont supplier of high-capacity solidstate
drive storage solutions for the chip design,
biotech and cloud computing sectors, base their
Asia operations in Hong Kong.
The digital economy connects China and
the Bay Area not only through telecom and
Internet, but through emerging sectors such as
gaming. San Francisco Game developer Zinga,
for example, employs 250 game developers in
its Beijing office.
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Key Industry Sectors
Game Strategy
Online gaming is rapidly going global, and game developers and animators
speak a common technical language. No surprise, then, that
interactive animation development lends itself well to cross-border
collaboration—not just for games but for apps, feature-length films,
and beyond.
San Francisco digital art and animation studio Concept Art House
(CAH) has been in China since its inception in 2007, with a studio in
Shanghai’s Yangpu District. It began with three founders and two employees
and as of early 2013 had a staff numbering 140–200 in San
Francisco and 120 in Shanghai.
Founders included concept artist James Zhang, who provided
digital art solutions for Star Wars Galaxies published by LucasArts and
Lair for PlayStation; Matthew Le Merle, a Booz-Allen consultant and
gaming enthusiast who joined as an investor; and Xuan Li, who led
CAH’s China expansion by building capacity and winning contracts
with Shanda and Tencent, including work on Worlds of Warcraft, a favorite
online game in China with 7 million users. Other clients have included
NBC, Disney, AOL and Sina.
CAH chose Yangpu for its proximity to universities and the cluster
of digital artists that had begun to form in what had been an industrial
area. “We got a brand new facility, with infrastructure just being built
out, near the largest concentration of students studying digital arts in
the world.”
Le Merle says that the Bay Area-China linkage makes good business
sense on several levels: demand for higher-quality entertainment is
growing among China’s rising middle class; costs of making traditional
live action films (or buying older titles from catalogues) and physically
distributing them to larger audiences in emerging markets are up
sharply; Bay Area companies are at the cutting edge of digital technology,
but lack enough skilled workers locally to serve global markets;
Chinese studios have upped their game significantly in terms of quality;
and the time difference enables CAH to work on client projects 24/7.
“China has a reputation as a place to get rapid turnaround of product,”
Le Merle says, “but it has also proven to be an active market in its
own right.” The Shanghai studio has recently taken on more autonomy,
he adds, doing its own business development and account management.
The volume of available skilled talent is key. “We pay normal
wages and work normal hours, we’re fully compliant with all regulations
and standards,” he stresses, “and we still have a cost advantage.”
Using this business model, CAH sees new market opportunities going
forward, beginning with digital trading cards or graphic novels. But
the big market could be online education, particularly as libraries become
digitized and schools offer courses beyond their physical, local
boundaries. “I see a lot of value in examining how we use technology to
educate a much larger population,” Le Merle says. “Why doesn’t it
make sense for 100 million Chinese to get an education without necessarily
having proximity to professors or classrooms?”
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Major Firms Find Their Niche
Legacy Silicon Valley tech firms, active in China
since the 1980s, have seen their early investments
in infrastructure, R&D centers and university programs
pay off. But as the China market matures
and domestic competitors expand their low-cost,
off-the-shelf solutions and services, margins are
being squeezed, and success is a function of
scale and finding new niche business.
Oracle Corp. entered China in 1989 with a
clear strategy—to partner with government, business
and academia to embed their technology in
as much of China’s initial computing and network
architecture as possible, laying the foundation for
long-term business growth.
“Going back twenty years,” says Oracle senior
director of business development Brad Tewksbury,
“you’d go in, find a partner, then to get
anywhere in winning government contracts you
needed to show skin in the game by building
R&D centers. For software companies you’d invest
in centers of excellence focusing on key verticals—finance
in Shanghai, government in Beijing,
manufacturing in Shenzhen. Moving forward
over the years, you’d need to do training through
the universities and through the R&D labs for
customized projects.”
Oracle currently serves its top 500 enterprise
accounts in China—mainly SOEs, government
agencies and large institutions—through a dedicated,
direct sales force. A multi-channel focus is
selling database, middleware and application
solutions in key public-private verticals such as
healthcare, pension benefits and infrastructure.
One important channel is Chinese software outsourcing
partner Neusoft: Oracle often places
staff in its six software centers, providing training
in particular verticals, and it teams with
Neusoft to bid on projects. “They can just bid
on a solution and go to market with Oracle as an
ISV partner,” Tewksbury says, “and on some
huge-scale government contracts we can go in
as a quasi-Chinese company.”
In Tier 2 and Tier 3 cities, Oracle is now selling
database, middleware and application solutions
in retailing, government services, banking and
telecom. Once a solution is installed and proves
successful, Tewksbury says, bidding the next job
and the one after become easy, especially with a
known brand and the right connections. In all,
Oracle has 16 branch offices, 4 R&D centers,
3 solutions centers, 1 customer support center,
2 consulting centers and some 1,500 partners,
25,000 customers and over 4,500 employees
in China.
Oracle’s clients include the following:
Ping An Bank uses Oracle’s FLEXCUBE core
banking solution to cross-sell products and
assess related risk.
China Mobile, China Telecom and China
Unicom use Oracle’s Exadata Database
engineered system for a variety of data
management solutions, including both
online transaction processing (OLTP) and
data warehousing.
Metallurgical Corp. of China in Chongqing
uses Oracle software to create a Database as
a Service (DaaS) model to run its business of
constructing steel plants around the globe.
Oracle was an early partner in 2005 with Chinese
developer Shui On Land at SOL’s knowledge
and innovation community in Shanghai’s
Yangpu district. An Oracle Advanced Technology
Solution Centre has been testing software products
for the China market in areas such as distance
learning, broadband content, e-commerce
and radio frequency identification (RFID) technology.
A Dalian global support center opened in
2007, and is expected to become a full-service
outsourcing center for the region.
Tewksbury believes Oracle is well-positioned
in China to compete in the big data space, given
its leadership in data management and analytics
solutions. At the low end of the market, large
accounts—and especially the government—are
resistant to cloud/software-as-a-service providers
like Salesforce.com because data resides outside
China’s borders; at the other end, China’s tech
sector has recently been getting stronger in
hardware but less so in database software and
has no real indigenous database companies to
compete with Oracle for large accounts with
complex data management needs.
Intel Corp.’s Intel China Research Center
(ICRC), established in 1998 in Beijing, is made up
of two labs for research in communications and microprocessor
technology and an Advanced Platform
Development Center to develop component
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Key Industry Sectors
technologies and system architectures for Intel’s
future chipsets and platform products. In Shanghai,
the company has a wafer manufacturing
plant; an R&D center that focuses on Flash silicon
design, chip package development, and digital
home system development; and a software development
center. Intel opened a $2.5 billion
semiconductor manufacturing plant in Dalian in
2010 and has a testing and assembly site in
Chengdu. Its combined investment in China totals
roughly $4.7 billion.
Intel has more recently partnered with Chinese
laptop and smartphone manufacturer
Lenovo on a new rugged Classmate-Plus laptop
for students and the power-efficient, high-end
K900 smartphone, both powered by versions of
Intel’s Atom processor.
Cisco Systems has had a China presence since
1994. It was instrumental in developing China’s
Internet infrastructure and in offering network
connectivity and big data solutions to help government
and business clients achieve scale and
improve productivity across large enterprises. Beyond
that, it has partnered with universities and
provincial governments to provide new education
and training opportunities as well as pilot programs
that expand delivery of public services.
Rebuilding after the 2008 earthquake in Sichuan
Province provided a laboratory for redesigning
Sichuan’s healthcare and education systems and
transforming its workforce, using information and
communications technology. Under a three-year,
$50 billion public/private partnership, Cisco:
developed 94 online schools with 1,140
technology-enabled classrooms benefitting
135,000 students and 8,000 teachers, along
with a 26-site TelePresence professional development
network that has helped 112,000
teachers enhance their skills;
built 66 healthcare organizations, 6 regional
data healthcare centers, 2 operational centers
and an emergency response center in the
establishment of smart hospitals, mobile
clinics, telehealth services in remote or
inaccessible areas and a regional healthcare
cloud; today, the system supports 7,000
doctors and practitioners, 15,000 inpatients
and 280,000 outpatients, and processes 60
million rural cooperative medical insurance
records and 400,000 electronic medical
records, on a monthly basis;
expanded its nationwide Cisco Networking
Academy (CNA) to 51 schools in Sichuan
and all of the province’s vocational colleges,
providing information and communications
technology (ICT) training for 7,400 students
and teachers over 2008–11.
The nationwide CNA program, launched in
1998, offers a blended program of classroom and
cloud-based curricula for training in the design,
building, securing and maintenance of computer
networks. It has provided university, vocational
and continuing education training to more than
207,000 students through 2012.
The Cisco China Research and Development
Center (CRDC), established in 2005 in Shanghai’s
Caohejing Economic Development Zone, is the
firm’s third largest R&D center with 3,300 employees
and branch offices in Hangzhou, Suzhou,
Hefei, Beijing and Shenzhen, representing a cumulative
$100 million investment.
CRDC has launched a joint lab for green technology
with Tsinghua University, the University of
Electronic Science and Technology of China
(UESTC), and Chongqing University of Posts and
Telecommunications (CUPT), to develop network
platform-based architectures and systems that
improve energy conservation, emissions reduction
and sustainable growth. The Center also has
various joint research projects with Tongji University,
Zhejiang University, the University of Science
and Technology of China (USTC), Shanghai
Jiaotong University, Fudan University, and Beijing
Jiaotong University.
More broadly, CRDC’s R&D supports service
providers, large enterprises, small and medium
businesses, and consumers domestically and
worldwide, covering a range of networking technologies,
including next-generation networks,
video, mobile internet, data center virtualization,
collaboration and cloud computing, and borderless
networks.
A Tough U.S. Sell for Chinese Suppliers
Global competition from China in telecom has
developed more quickly than expected. Huawei,
the world’s second largest producer of telecommunications
equipment, had $2.7 billion in global
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Ties That Bind, 2014 Edition
revenues in 2002, 10 percent from sales outside
China. Its 2012 global revenues totaled $35 billion,
70 percent of that from overseas. In recent
years Huawei has emerged as a major competitor
for equipment suppliers like Cisco, both in China
and overseas.
Building on its base in telecommunications infrastructure
equipment, Huawei is also seeking to
become a leading global brand for smartphones
and mobile devices, rivaling dominant players
Samsung and Apple and other producers such as
Nokia, Lenovo, LG and HTC. To compete at
higher levels globally, like its principal Chinese
competitor, ZTE, it is investing more than 10
percent of its annual revenues in R&D.
In the U.S., Huawei and ZTE have made inroads
selling basic, high-quality, low-cost network
systems to small business customers and small
regional telephone companies. An important
specialty has been high-speed regional broadband
and municipal Wi-Fi in underserved rural
areas, as customer demand shifts from wireline to
wireless and from voice calls to Internet usage,
and as major incumbent phone providers have
been reluctant to take on build-out and service
costs in a highly regulated market segment.
Huawei not only fills an infrastructure gap for
rural providers, it is also one of only three global
competitors—none of them in the U.S.—capable
of building out a 4G-LTE network entirely with its
own equipment, operating system and software.
U.S. mobile carrier customers include Clearwire,
Hibernia, and Leap Wireless. AT&T and Sprint
offer Huawei handsets at retail outlets.
Both Huawei and ZTE have encountered
pushback in the U.S., U.K., Canada, Australia
and India over questions about their technology
and pricing structures: whether government
ownership and subsidies give them an unfair
price advantage; the extent to which they owe
their rapid innovation to illegal technology
transfer; and whether their network infrastructure
contains Chinese government-mandated
“back door” vulnerabilities that enable remote
access to monitor data or disable systems.
Huawei, which is an employee-owned company,
points out that such concerns have never been
substantiated and that the company and its gear
are globally deployed and work with major
nationwide carriers, including in the U.K., Canada,
Australia and India.
With Huawei expanding in the U.S., the issue
is significant. At the end of 2012, it posted $1.3
billion in revenues and had 1,750 employees in
the U.S. Its California workforce numbered about
700, engaged primarily in R&D and marketing—
with more than 620 in Santa Clara and more than
100 in San Diego—according to Dean Sirovica,
vice president for business development with
Huawei R&D USA.
Huawei opened its U.S. headquarters in Plano,
Texas in 2001 to be close to key telecom firms
such as Nortel Networks, AT&T and Texas Instruments.
“After a few years, they realized that
the telecom market was colliding with the Internet
communications markets, and that the line
between delivering telecom and Internet was
becoming very fuzzy,” Sirovica says. Over time,
Huawei’s flagship R&D center in Santa Clara—
one of four in the U.S., has become an increasingly
important part of the firm’s growth strategy.
“As the world continues to globalize, any
company needs to source technology wherever
it’s being developed,” Sirovica explains. Huawei’s
focus in Silicon Valley is on new growth markets—
consumer mobile handsets and enterprise cloud
storage and IT. Key verticals include education,
healthcare and electric power. Much of the R&D
work involves technology licensing. “If you look
at the way business is evolving in Silicon Valley,
everybody is evolving toward collaborative innovation,”
he adds. “The days of the white coats at
Bell Labs are gone; they’re looking to start-ups.
Huawei is no different. Our desire is to be a
regular member of the ecosystem and do business
in a regular way.”
That has not been simple. A 2003 joint venture
between Huawei and network infrastructure firm
3Com combined licensed 3Com technology and
Huawei’s manufacturing and marketing resources
in Asian markets. But a subsequent 2008 Huawei-
Bain Capital bid to acquire network infrastructure
firm 3Com was blocked by the U.S. government,
due to 3Com unit Tipping Point’s cyber security
work for the U.S. military. 3Com was absorbed in
2010 by Hewlett-Packard.
A similar 2007 joint venture with Mountain View
Internet security firm Symantec ended in 2012
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Key Industry Sectors
when Symantec sold its 49 percent stake back to
Huawei. A 2011 bid for the technology assets of
bankrupt 3Leaf Systems, a Santa Clara virtualization
company with processing technology to link
servers for low-cost supercomputing, was withdrawn
after a negative review from the Committee
on Foreign Investment in the U.S. (CFIUS), which
regulates security-sensitive foreign investment.
Security issues create a conundrum for Huawei
and for U.S. regulators. Independent analysts
have identified specific security vulnerabilities in
Huawei equipment, but have not alleged that
they were intentional. A 2012 White House Security
Council report cleared Huawei of spying allegations,
but an October 2012 House Permanent
Select Committee on Intelligence report focused
on the difficulties in fully identifying hardware and
software backdoors in a network and criticized
what it felt were inadequate responses from
Huawei and ZTE about their business structures
and government ties. The report recommended a
ban on federal purchases of Chinese telecom
equipment and urged state and local governments
and U.S. companies not to do business
with Chinese suppliers. A classified annex of the
report is said to identify specific network security
breaches but is thinly documented. In light of the
fact that no evidence of actual wrongdoing was
presented, it is difficult for companies like Huawei
to address such charges.
China has criticized these allegations as unfounded
and insists that they reflect a political
agenda and are motivated by protectionism. In
late October 2012, two weeks after the report
was released, China Unicom removed core Cisco
cluster routers from its China169 backbone network
serving Wuxi in Jiangsu Province, claiming
security issues—a move largely seen as retaliation.
Cisco supplies core routers to both China
Unicom’s China169 network and China Telecom’s
163-Network, which together handle 80 percent
of China Internet traffic.
Congress subsequently enacted a federal ban
on Chinese telecom equipment purchases as part
of the March 2013 budget continuing resolution
signed by the president. Language in the provision
is vague, referencing both subsidized pricing and
security concerns. At about the same time, Japan’s
Softbank bid to acquire Sprint-Nextel, and the two
firms have assured Washington lawmakers that
Sprint would not integrate Chinese equipment into
its network and would replace the Huawei equipment
used by Sprint partner Clearwire.
Governments in Canada and Australia also exclude
Chinese equipment suppliers from their procurement
programs; New Zealand has explicitly
opted not to do so. The U.K. and India require
inspection and certification of Chinese telecom
equipment imports. The EU threatened an antidumping
investigation into pricing and possible
illegal subsidies to Huawei and ZTE involving some
$1 billion annually in network equipment sales
throughout the EU. In August 2013 the investigation
was put on hold pending China Mobile’s
awarding of the contract for its 4G network buildout;
that same month, European vendors Ericsson,
Alcatel-Lucent S.A, and Nokia Siemens Networks
were together awarded nearly a third of the $3.2
billion in contracts.
Huawei’s Americas revenue grew by only 4.3
percent in 2012; U.S. revenues, while not made
public by the company, were reportedly less
than $2 billion. With sales slowing, a senior
Huawei executive told an April 2013 analyst call
that the company no longer sees the U.S. market
as a strategic priority, although it will continue
to sell handsets and service its existing
U.S. customer base.
China Calling
By contrast, China Telecom and China Unicom
maintain comparatively low-profile sales and technical
support offices in San Jose, and China Mobile
opened a Milpitas R&D center in 2009—its
first overseas. China Telecom and China Unicom
offer cross-border business voice and data services
between the U.S. and China. China Unicom has a
stronger Bay Area presence and also offers tailored
cloud data and mobile payment solutions.
Ben Chen, president of West Region operations
for China Unicom Americas, says his company has
invested more than $30 million in hardware and
infrastructure for its enterprise service, which offers
up to 200 gigabyte capacity. This provides Chinese
businesses in the U.S. with a level of comfort
about assured capacity, tailored services and security.
It also makes it easier for a U.S. firm to set up
an office or facility in China.
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Ties That Bind, 2014 Edition
Chen also looks for telecom and Internet innovations
that potentially benefit the China
wireline and mobile markets. China Unicom has
the largest 3G subscriber base of the Chinese
carriers and was Apple’s first iPhone partner in
China. Its WoStore, launched in 2010, sells
mainly apps for Android phones and fills an important
niche since Apple sells its own apps,
Google has scaled back its China presence, and
private app stores are notorious for pirated code
that steals user information.
So far, China Unicom has taken a risk-averse
approach in Silicon Valley, licensing technology
but avoiding acquisitions. Among the areas of
innovation it is watching closely, says Chen, are
payment, data centers and the holy grail for tapping
emerging markets—a low-power, full-featured
smartphone delivered for under $100.
China’s leading Internet search engine,
Baidu, has announced plans to open the Institute
of Deep Learning (IDL)—its first whollyowned
research center—in Cupertino. In announcing
the new initiative at Baidu’s January
2013 annual meeting in China, CEO Robin Li
said the IDL will focus on research in the machine
learning field, in which computers use
data analytics to simulate the way a human brain
absorbs information and applies context. A wellknown
example of machine learning is Apple’s
Siri voice recognition feature.
The Foxconn Connection
If any one company can be said to embody U.S.-China trade during
the past decade, it is arguably Foxconn Technology Group, the
original design manufacturing (ODM) unit of Taiwan electronics
contract manufacturer Hon Hai Precision Industry Co. Foxconn designs
and manufactures products to customer specifications, and the
finished product is sold under the customer’s brand. The ODM retains
rights and related patents to design contributions it has made
to the product.
The company has manufactured the Apple iPod, iPhone and iPad;
the Amazon Kindle; Sony’s PlayStation; Nintendo’s Wii U; and, as early
as 2001, motherboards for Intel. In 2013, it announced plans to make
the Google Glass wearable computer at a facility in Santa Clara and
has licensed technology to Google relating to head-mounted displays.
Foxconn is the world’s largest electronics manufacturer, with a
workforce of 1.2 million—900,000 of them at 13 factories in nine Chinese
cities. The largest and most well-known such facility is Foxconn
City in Shenzhen, with some 230,000 employees; another 120,000
work in Zhengzhou Technology Park. Most Foxconn workers live in
company dormitories; the company’s Chengdu complex has 70,000
dormitory residents.
At least 40 percent of Foxconn’s $132 billion in annual revenues is
estimated to come from Apple, and Apple has become closely associated
with headlines about working conditions and wages at Foxconn
facilities—from worker suicides and wage protests in Shenzhen to a
factory explosion and worker riots in Chengdu.
Foxconn’s growth and the challenges it faces reflect the evolution
underway in Chinese manufacturing and trade: mass urbanization as
rural Chinese flock to cities for work; pricing and margin squeezes due
to global competition; and manufacturing moving further inland to cities
like Chengdu and Chongqing as land becomes scarce and production
costs rise nearer the coast.
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Key Industry Sectors
This growth has come at a price. Apple has worked with Foxconn
to resolve workforce issues that have compromised its branding, Foxconn
workers have received pay raises, and overall safety and living
conditions have improved. But as Foxconn has added capacity, the
worker training, safety measures and amenities needed to support it
have not always kept pace. The company’s employee turnover rate
has been 10–20 percent, in the mid-range for China, particularly as
overall wages have risen and workers routinely quit for higher-paying
jobs with promotion opportunities.
Foxconn is vulnerable, however, to Apple’s business flow, including
slowing growth in U.S., European and Japanese markets, and a slow
rollout of Apple products in China due to price point and network
limitations, as well as competition from Android and Samsung. Apple
CEO Tim Cook announced in December 2012 that the company will
invest $100 million to manufacture Mac computers—possibly the Mac
Pro or Mac Mini—in Texas. It is not yet clear whether Foxconn, which
has a Texas production facility, will do the manufacturing.
Foxconn reported a 20 percent drop in earnings in Q1 2013, in large
part due to slowing Apple and Nokia demand, although Q2 earnings
rose modestly. The company is expanding and diversifying its U.S. activities
with Google, and has branched into new products of its own—
60-inch flat-screen televisions sold under the VIZIO brand in the U.S.
and by RadioShack in China (which may eventually play a part in Apple’s
television strategy), as well as a wearable watch computer that syncs to
an iPhone of iPad, and a reported line of low-cost tablets that run on an
open-source Mozilla Firefox operating system. Apple, meanwhile, is
sending more of its lower-end business to contract manufacturer Pegatron,
a Taiwanese spinoff from computer-maker ASUS that employs
70,000 workers at plants in Shanghai and Suzhou.
Cashing In on Chips
Global suppliers are closely monitoring China
Mobile’s continued rollout of 3G service in rural
China, its issuance of 4G TDD-LTE licenses, and
the overall success of its TD-SCDMA standard
both within and outside China. The standard is a
test case for indigenous innovation, following
the Five-Year Plan. China Mobile’s scale provides
a critical mass customer base that puts
domestic suppliers on a more level competitive
playing field in the world’s largest market. Finally,
it is expected to drive innovation in lowcost,
low-power handsets, Internet television
and advanced broadband deployment in the
Middle East, Africa and Asia.
Marvell Technology Group Ltd. sees dramatic
new opportunities in China Mobile’s scheduled 4G
TDD-LTE rollout because the nascent Chinese
standard has no dominant chipset supplier, as
Qualcomm and Samsung are in 2G and 3G and in
the 4G FDD-LTE standard prevalent in the United
States. China Mobile’s subscriber base, the rapid
growth seen in smartphone sales, and the Android
operating system’s leadership position in China
suggest a potential market larger than that of Verizon
and AT&T combined.
Marvell was co-founded by Dr. Sehat Sutardja
and his wife, Weili Dai, immigrants from Indonesia
and China, respectively, in 1995. Both are UC
Berkeley alumni and are the principal donors for
Sutardja Dai Hall, the home to CITRIS (the Center
for Information Technology Research in the Interest
of Society) and a nanofabrication laboratory on
the Berkeley campus. They have also supported
the MIT Media Lab’s One Laptop per Child project;
the Smart Electronics Initiative cross-industry
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Ties That Bind, 2014 Edition
collaboration to cut energy consumption in consumer
electronics; and the U.S.-China Green
Energy Council, a public-private partnership in
California and China.
Marvell employs nearly 2,000 people in China,
with Shanghai being the largest R&D site. Many
China-based engineers are focused on the mobile
sector in silicon design, digital signal processing,
protocol stacks and Android software. In addition,
Marvell has mobile R&D design centers in the U.S.
and Israel. Marvell has provided 3G chipsets for
Samsung, Motorola, Huawei, ZTE and other Android
handset makers. It also designs chipsets for
television set-top boxes, LED-screen TV processors
and computer hard disk drives.
The “sweet spot” for Marvell lies in a systemson-chip
(SOC) solution for TDD-LTE that includes
full applications and integration processing. Down
the road, as China’s government builds out fiber
optic cable to the home to reach China’s 175 million
cable television subscribers, Marvell sees a
valuable growth market for chipsets supporting 10
gigabits per second transmission network infrastructure,
eventually ramping up to 100 gigabits—
the standard for instant delivery of feature-length
HD programs.
The Taiwan Tech Community Plans its Future
Taiwan faces its own challenges as it attempts to reposition itself as an
innovator in a fast-evolving technology landscape. The task is made
more difficult in the shadow of the mainland’s rapid rise.
The scale and speed of the PRC’s economic growth and technological
advance has, to an extent, crowded out Taiwan’s efforts to diversify
its innovation and promote its own global brands. More than
anything, commoditization of hardware and migration of value-added
away from production, have disrupted an OEM culture and infrastructure
dominated by Taiwan’s leading global chip foundries, Taiwan
Semiconductor Manufacturing Corp. (TSMC) and United Microtechnology
Corp. (UMC), as well as low-cost manufacturers like Acer,
ASUSTek, Quanta and MiTAC.
Government is an active partner: Taiwan’s tech sector grew out of a
1979 Ministry of Economic Affairs initiative to redeploy foreign exchange
reserves toward moving the island’s economy up the value
chain from basic manufacturing to semiconductors, computers and peripherals.
The Industrial Technology Research Institute (ITRI) administers
the program, oversees Taiwan’s Hsinchu Science and Technology Park,
selected the early students to go abroad, and provided seed funding for
professional organizations such as Monte Jade and CASPA in the 1980s.
Today ITRI maintains a worldwide office network—including a Bay
Area office in San Jose—that engages in early-stage incubation, R&D
collaboration, contracted research, technology licensing, recruiting
and training. Worldwide, ITRI employs 5,800 people, administers
some 18,000 patents and generates half of the Taiwan government’s
R&D budget. It works in close coordination with Taiwan’s trade promotion
arm, TAITRA, and with the science and technology division of
the Taiwan consulate, the Taipei Economic and Cultural Office
(TECO), both with offices in Santa Clara. They cooperate closely to facilitate
trade and technology exchanges, and to encourage Taiwanese
graduates and entrepreneurs to return home and help expand and diversify
Taiwan’s skills and knowledge base.
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Key Industry Sectors
Major Taiwanese tech firms with presences in Silicon Valley include
semiconductor foundries TSMC and UMC; ASUS, which has a service
center and also collaborates with Google on the Nexus 7 tablet; Acer,
which has its U.S. headquarters and an R&D lab in San Jose and in
2011 acquired Mountain View cloud software firm iGware, leading to
the launch of its CloudMobile Android phone in 2012; GPS, server,
workstation and cloud services firm MiTAC International, which has a
factory and assembly configuration center in Fremont and division offices
in Fremont and Santa Clara; motherboard and PC peripherals
maker GIGABYTE; and monitor/display maker BenQ.
A number of major Silicon Valley tech firms also have presences in
Taiwan. Hewlett-Packard opened a global R&D center, the Computing
Hub, in 2010 and a service center in 2012. Cisco has operated a
networking lab since 1997 in collaboration with the Institute for Information
Industry and four major Taiwan OEMs, including Acer and
Tatung, and has been a leading provider of networking equipment
and services to Chunghwa Telecom. Oracle’s database, middleware
and applications programs are taught through its Oracle Academy
program at 26 Taiwan universities. Applied Materials opened a flatpanel
display/thin-film solar equipment manufacturing center in
Tainan in 2008, and has applied to build a $5 billion flat-panel LED
R&D facility in Southern Taiwan Science Park.
In the Bay Area, CHT Global is the U.S. telecom solutions arm of
Taiwan’s premier phone and Internet provider Chunghwa Telecom.
CHT, based in San Jose, provides wholesale business voice, data,
conferencing, hosting and cloud/data center services over its secure
private network, as well as international residential phone service via
its Net2Asia calling card. CHT’s primary market is business customers
with extensive cross-border Asia-U.S. activities and a need for highcapacity,
secure broadband connections. It has reciprocal relationships
with national carriers in more than 100 worldwide locations, among
them China’s three main operators. CHT expects to launch mobile
service in late 2013.
Taiwanese cell phone designer and manufacturer HTC Corp. has
its HTC America U.S. headquarters in Seattle, but expanded to San
Francisco in 2008 with the acquisition of industrial design firm One &
Co, designer of the HTC One Android and Windows phones. HTC
recently introduced the co-branded Facebook HTC First phone, which
boots up to a specially designed Facebook Home user interface.
HTC America advanced technology manager Gary Yao is tasked
with scouting for innovations in hardware, user interface and rich audio-visual
features. Yao says he talks regularly with venture investors
and their portfolio companies. Discussions with universities and laboratories,
he says, are often likely to lead to technology acquisitions or
IP licensing deals. Intellectual property protection, whether in patents
or licensing, remains a minefield, Yao admits. He is currently hunting
for new companies and technologies working in low-power design,
enhanced multimedia features and device contextual intelligence.
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Meanwhile, semiconductor engineers—many from Taiwan—are increasingly
concerned that the industry and its related knowledge base
in Silicon Valley are gradually hollowing out. On the surface, little appears
to have changed over two decades for the Taiwanese engineering
community in Silicon Valley. The flow of students has been steady, but
with relatively flat growth; their focus is still largely chip design and
hardware for computing and networking, with some growth in mobile
Internet. Attendance at annual conferences and after-work meetings is
still strong, but numbers have remained fairly static.
Engineer Joseph Lin, an advisor to and former president of CASPA,
has worked in Silicon Valley since the mid-1980s. He says that the industry
continues to attract highly-skilled engineering students and
workers because of the cutting edge work done there. But as chipsets
and integrated circuits become faster and smaller and provide more
storage and security, prices are falling. That has translated into mergers,
consolidation, layoffs and clean rooms either closing or staying
without moving into more advanced technology modes.
Lin worries that Silicon Valley is losing talent and historical knowledge,
and that loss will contribute to the long-term erosion of its
manufacturing base. “Silicon has always been the DNA of this place,”
he says. “It’s why they named it Silicon Valley when it was first built on
orchards. Now a lot of that is going away.”
LAW
The Wild West Settles Down
Foreign law firms were not officially permitted
into China until 1992, but as early as 1979, firms
such as Coudert Bros., Baker & McKenzie and
Graham & James took advantage of a loophole in
Chinese law allowing in trade-related consultants.
They established legal “consultancies” in their
home countries or in Hong Kong and then
opened informal China subsidiary offices.
China had not yet reinstituted a formal legal
system; criminal and civil cases were decided by
the government and the Communist Party. In the
absence of commercial contract law, precedent
determined a loose legal framework for joint
ventures until a dispute arose or the government
intervened. At first, arbitration was permitted only
within China. Over time, Hong Kong and Sweden
were allowed as arbitration venues. Today the
arbitration venue is left to negotiation by the
contracting parties.
The favored arbitration venue specified in
commercial contracts is the China International
Economic and Trade Arbitration Commission
(CIETAC), a panel of international lawyers established
in China in 1989. Intellectual property (IP)
cases are the exception and are typically heard in
court. IP cases can be highly technical and if the
arbitration panel gets it wrong, there is no appeal
process, as in civil court. Also, the absence of juries
and punitive damages in Chinese courts moderates
potential awards, and courts have the power
to grant immediate injunctive relief to plaintiffs.
Foreign attorneys officially practice the laws of
their home countries only. They may not represent
clients in Chinese courts or render opinions on
Chinese law, nor are they permitted to take the
Chinese bar exam. Where representation of a foreign
or Chinese client touches on issues of Chinese
law, the work must be done by a Chinese law
firm. This wall preserves the opacity of Chinese law
and is designed to protect and ensure a role for
Chinese firms in the growth area of international
commercial law. The wall has two sides: Chinese
lawyers may not join foreign law firms without first
surrendering their Chinese law licenses.
Representatives of foreign law firms in China
must be attorneys in good standing with at least
three years’ practice experience in their home
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Key Industry Sectors
countries. Senior representatives must spend at
least 180 days of the year in China, bringing them
under Chinese tax jurisdiction.
Law firms initially acted as advisors to home
country clients on trade and customs issues,
contract preparation, intellectual property protection
and formation of joint ventures. Since
China’s admission to the WTO, the market for
investment-related legal services has expanded
to include cross-border regulatory and tax compliance;
establishment of wholly foreign-owned
enterprises (WFOEs) and R&D centers; M&A
transactions and related due diligence; crossborder
technology licensing; real estate transactions;
and public share listings.
U.S. law firms active in China were not hurt
seriously by the global downturn in and of itself,
as China experienced a counter-cyclical upturn
thanks to stimulus, and U.S. client firms turned
to China to offset slack demand in the U.S.
Where they saw business was in due diligence
and advisory work involving cross-border startup
investment and IPOs, as venture capital and
public equity retreated and as the Chinese government
clamped down on an overheated property
development market.
The already weak market fundamentals were
exacerbated by the rise of Chinese “reverse
IPOs,” mergers of private Chinese firms into
dormant publicly-listed U.S. companies in order
to expedite listings with minimal financial disclosure
(see “A Two-Way Street” in the Investment
section of this chapter). Some 20 Chinese firms
came under attack from hedge funds and other
short sellers over accounting and valuation issues.
Business is gradually returning, but in different
areas. Among the recent trends for overseas law
firms in China are
intensified focus on attracting large, relatively
safe Chinese banks and state-owned firms
as clients;
increased presence in Beijing, to build and
maintain government contacts, and in Hong
Kong, to concentrate on offshore financing
and investing;
meeting the needs of growing renminbi funds
and other domestic Chinese investment vehicles;
leveraging cross-border expertise to serve
Chinese banks, construction companies and
SOEs exploring overseas real estate, brown
field and M&A opportunities in the U.S.
Thomas Shoesmith, a partner at Pillsbury
Winthrop Shaw Pittman in Palo Alto, heads the
firm’s China practice. He previously ran Pillsbury’s
Shanghai office, which he joined in 2008 when
Pillsbury absorbed Thelen Reid Brown Raysman &
Steiner’s China practice. Despite early signals that
China would open its legal service market further
to foreign firms, Shoesmith says little has changed.
But as the business environment becomes increasingly
sophisticated, he adds, that has not
been a serious problem. Divisions of labor with
Chinese law firms are as rigid as ever, but years of
working together on cross-border cases have taken
both sides beyond the initial learning curve to
build closer bonds. And in areas such as intellectual
property, foreign firms and their counsel have
a clearer sense of where the technical and legal
risks begin and end.
Pillsbury, which has an office in Shanghai, expects
to open a Beijing office later in 2013 in
order to focus on state-owned enterprises and
financial institutions. Shoesmith sees likely
China-related business prospects in the Bay
Area coming in three key areas: large publicprivate
development and infrastructure projects
like high-speed rail; sports/retail complexes or
mixed-use housing and commercial projects;
and ongoing investment in tech and selective
outbound M&A to China.
U.S. law firms are also active in taking Chinese
companies public in the U.S. Value-added telephony
(mobile apps), which is growing rapidly,
is another area where limitation of foreign activity
is creating the need for work-arounds advised by
U.S. lawyers.
“Things are kind of settling down; it’s not a
fire sale anymore,” Shoesmith says, “We’re
seeing the rise of China as a market, not just a
place to build things cheaply.” What looks like
tightening, Shoesmith suggests, is mainly greater
caution on the part of the Chinese government
and foreign investors.
Beijing is gradually allowing more wholly foreign-owned
investment versus joint ventures, but
it wants more rigorous reporting; and foreign
investors are adapting to a market that lacks
transparency and favors domestic competitors,
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Ties That Bind, 2014 Edition
taking smaller stakes in companies with investments
structured to mitigate risk and exit easily.
Shoesmith has represented Chinese computer
maker Lenovo in its international joint venture with
Massachusetts-based cloud computing/big data
firm EMC Corp.; has represented San Jose IT solutions
provider Ingram Micro on several international
acquisitions; and has participated in the public
listings of more than 15 China-based companies.
A sampling of other Bay Area law firms active
in China includes the following.
Davis Polk & Wardwell, based in New York,
serves Silicon Valley through an office in Menlo
Park and maintains a China presence in Hong
Kong and Beijing. Its Hong Kong office was upgraded
in 2010 to become a Hong Kong law
practice, bringing together legal expertise in
Hong Kong, the U.K. and the U.S. to serve global
financial clients.
The firm advised Baidu in its purchase of
Shanghai-based PPS Net TV’s online video business
in 2013 and in an earlier 2012 acquisition of
a majority stake in video platform Qiyi. It helped
prepare New China Life Insurance Co.’s public
listings on the Shanghai and Hong Kong exchanges;
Charles River Laboratories International’s
proposed $1.6 billion takeover of Wuxi
Pharmatech in 2010; Dalian Wanda’s acquisition
of AMC Theaters; and the management buyout
of Shanda Interactive by a family-owned offshore
company led by Shanda chairman and CEO
Tianchao Chen.
Orrick, Herrington & Sutcliffe’s history in the
Bay Area, and specifically San Francisco, dates
back to 1863. The firm expanded into China in
2005 through its acquisition of the China practice
of Coudert Brothers. Coudert had been the first
foreign law firm to open offices in Hong Kong in
1972, the first in Beijing in 1979, the first to be
licensed in China in 1992, and among the first to
practice in Shanghai.
In 2006, Orrick lawyers served as U.S. counsel
to Sinopec Beijing Yanhua Petrochemical Company
Ltd. in its $500 million privatization by
China Petroleum & Chemical Corp., a transaction
that created a new path for PRC companies
to privatize overseas listed companies. The firm
also defended Baidu in an antitrust action
brought in China by rival search firm Tangshan
Renren Information Services in 2009—a challenging
case because China’s Anti-Monopoly
Law on the books at that time had no implementing
rules.
Orrick was lead counsel for aluminum producer
China Hongqiao’s $943 million IPO in
2011, and attorneys from Orrick’s San Francisco,
Hong Kong and Shanghai offices represented
VanceInfo Technologies in its 2012 merger with
rival HiSoft Technology International.
Wilson Sonsini Goodrich & Rosati (WSGR)
has its roots in Silicon Valley, providing crossborder
legal support to firms in debt placement,
public listing, M&A, trade and financial regulatory
compliance, technology licensing and IP protection.
Its initial China presence was in Shanghai
beginning in 2007, but it has more recently
opened offices in Hong Kong in 2010 and Beijing
in 2012.
WSGR represented Chinese chip foundry
Semiconductor Manufacturing International Corp.
(SMIC) in a five-year patent infringement trade
secrets case brought by Taiwan Semiconductor
Manufacturing Corp. (TSMC) in California. It also
advised on SMIC’s 2004 IPO, and on the Bank of
China’s 2006 IPO. In 2012 WSGR represented
Boyu Capital in the complex, multi-party 2012
financing for Alibaba’s buyback of a portion of
Yahoo’s early stake in the company, and it represented
Chinese Internet service provider Tencent
in a licensing deal with Activision Blizzard to
launch the “Call of Duty Online” game in China.
Cooley LLP, founded nearly a century ago in
San Francisco, developed early specializations in
emerging Bay Area industries such as venture
capital, information technology and life sciences.
The firm opened its first PRC office in Shanghai in
2011 but has been active in greater China since
1989. It advised on the formation of the first institutional
venture capital fund investing in China,
and has since handled cross-border M&A transactions
for U.S. clients and securities and corporate
matters for Chinese companies. In 2012, its
global investing fund formation group closed
three Shanghai funds representing a combined
$1 billion.
Cooley has advised clients on market entry;
distribution and licensing agreements; U.S. export
control compliance; and antitrust and IP
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Key Industry Sectors
protection, most notably representing San Jose
analog chip designer Monolithic Power Systems
and three Taiwanese firms in a patent suit
brought against O2Micro, a Taiwanese maker of
battery and power management systems.
Los Angeles law firm O’Melveny & Myers
(OMM) traces its roots back to 1885. OMM
opened offices in San Francisco in 1988 and in
Silicon Valley in 2001. Its China presence launched
in Hong Kong in 1994, followed by offices in
Shanghai (1996) and Beijing (2003). It was one of
the first U.S. law firms registered to practice Hong
Kong law, and its greater China practice today
deploys a team of more than 110 professionals.
OMM represented Chinese Internet marketing
technology firm Allyes in a 2006 acquisition by
China advertising company Focus Media and
advised security software provider Symantec
Corp. on antitrust compliance in its 2007 joint
venture agreement with Huawei Technologies to
manufacture and sell telecom network equipment
with integrated security software. The firm also
represented Mountain View-based Complete
Genomics in the firm’s 2012 acquisition by Chinese
gene sequencing and bioinformatics group
BGI-Shenzhen. (For more detail, see the Life Sciences/Healthcare
section below.)
LIFE SCIENCES/HEALTHCARE
Healthy Prospects
Bay Area research laboratories and medical facilities
are engaged in cutting-edge science with
major implications for healthcare worldwide. China
is a huge urban and rural market building a stateof-the-art
healthcare infrastructure from scratch
amid challenges of aging, wealth inequality,
chronic diseases, environmental illnesses and pandemics.
The synergies are most clearly seen in
China’s ongoing healthcare reform effort; in its
ambitions as a global provider of pharmaceuticals,
medical devices and treatment; and in financial
and policy trends influencing R&D and delivery of
care in the U.S.
1.3 Billion Patients, 95 Percent Coverage
Powerful demographic forces are at work, including
urbanization, the rise of affluence, and
the effects of an aging population. Some results
of these forces are occurring naturally, while
some are consciously directed by government
policies. Mass migration from the countryside to
cities over the past decade is already approaching
a quarter of a billion people. By 2025,
China is expected to have 220 cities with populations
exceeding 1 million; by 2030, China’s
urban population will pass 1 billion. Metro areas
will likely merge into megacities with as many as
20 million residents, where chronic ailments and
disease prevention will pose growing problems.
China’s middle class is expected to more than
double by 2020, to 700 million people; a growing
number of wealthier Chinese will have
higher expectations and the ability and willingness
to spend more for healthcare. More than
185 million Chinese are over the age of 60 today—13.4
percent of the population. The most
common illnesses in this cohort are chronic: circulatory,
vision, neurological, endocrine, nutritional
and metabolic, all requiring long-term
treatment and making up 23–40 percent of the
prescription and 40–50 percent of the over-thecounter
market. Government spending commitments
for a social safety net in healthcare
and pensions will add to demand.
Until the late 1970s, China’s healthcare system
was entirely government funded and government
run. Economic reforms launched with the country’s
opening in 1979 moved the system in the
opposite direction, toward a free-market model
under which government support was withdrawn
and healthcare providers were expected to operate
as profit centers. The focus of care shifted to
higher-priced tests and treatments, patients unable
to pay were denied care, and service quality
declined, sparking civil unrest.
China eventually dialed back the experiment
and has since been searching for a hybrid distinctly
Chinese model. In 2009, the government committed
RMB 850 billion ($124 billion) to a threeyear
healthcare overhaul focusing on the following:
Comprehensive insurance coverage for 90+
percent of the population, through expansion
of programs for urban employees, non-working
urban residents and the rural population; before
2007, only urban workers and retirees had
access to defined-contribution insurance plans
through their employers.
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Upgrading the pharmaceutical supply chain
from production to procurement and distribution,
in particular for drugs classified as essential
and/or eligible for government reimbursement.
Expansion of the National Essential Drug List
(NEDL) and the National Reimbursement Drug
Lists (NRDLs) from a combined 300 drugs to
520, adding children’s vaccines, cardiovascular
and chronic disease drugs, and anti-cancer
medications, allowing more direct purchasing
and capping prices.
Strengthening public health service disease
prevention and control programs, giving
added emphasis to prevention and vaccine
programs in central and western China.
Adding more than 300 county hospitals,
1,000 town-level health centers and 13,000
village-level clinics to the country’s grassroots
healthcare infrastructure, to increase coverage
and competition.
Modernizing nationwide public healthcare
and hospital infrastructure, standards and
practices, including funds for medical devices
and IT systems.
The 12th Five-Year Plan picked up in 2011
where those reforms left off, focusing on the
development and restructuring of indigenous
industry. It sets goals for consolidating a fragmented
pharmaceutical industry through M&A
and vertical integration to create at least 5 drug
manufacturers with RMB 50 billion or more in
annual revenues and 100 with revenues of RMB
10 billion or more. It also encourages companies
to set up overseas R&D centers and manufacturing
facilities.
A similar strategy applies to pharmaceutical
distribution (3 national distributors with RMB 100
billion or more in revenue; 20 regional distributors
with RMB 20 billion or more), and encourages
consolidation of small retail pharmacies into
regional and national chains.
Finally, the Plan commits government support
to build an indigenous medical device
industry that serves the domestic healthcare
market: 8–10 manufacturers with sales above
RMB 5 billion; funding and other support for 10–
15 medical device groups, 40–50 technology
companies plus manufacturing and demonstration
bases for device innovation; and an R&D/import
substitution program aimed at replacing mid- and
high-end imported devices.
Overlaying the above strategies is an increasingly
strict and sophisticated regulatory
regime to force quality and safety improvements,
alongside price caps on essential drugs,
limits on wholesale markups, crackdowns on
fake drugs and limits on advertising of non-prescription
remedies.
A 2013 KPMG report on healthcare and life
sciences in China points to three key trends as
Chinese companies scale up to compete globally
and as domestic and foreign companies turn their
attention to a growing Chinese market:
1. Overproduction of cheap basic products is
giving way to more efficient manufacture of
higher-quality products to satisfy a growing
and more demanding middle class; R&D
spending is up, as are vertical pipeline acquisitions
and foreign licensing arrangements.
2. Companies are extending their sales and
marketing into Tier 2 and Tier 3 cities as well
as the countryside, offering more affordable
products tailored to niche markets.
3. As the drive for quality has thinned margins,
firms are aggressively squeezing costs out
of their sourcing, manufacturing and supply
chains through acquisitions, partnerships
and re-engineering.
From the Outside Looking In
In the meantime, forces are converging that
make the China market especially attractive for
global healthcare providers and life sciences
technology firms.
In 2012, global pharmaceutical companies saw
patents expire on more than 40 brand-name
drugs earning a combined $35 billion annually.
For those companies, China represents an attractive
market for off-patent drugs in partnership
with local distributors, to help offset price declines
with volume sales. In some cases, domestic
Chinese manufacturers see opportunities to produce
their own generic versions, or to license in
the better-known brands.
In the U.S., lower risk tolerance for long clinical
trials and regulatory uncertainty have dampened
investment flows into earlier-stage life sciences
ventures. China is an exception, however,
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Key Industry Sectors
due to the government’s push to accelerate
healthcare reform.
The result is that the market potential for
branded, quality imports is high at the low end of
the market—basic hospital supplies, lab testing
equipment, basic over-the-counter and prescription
medications. At the high end are licensing
opportunities for specialty and orphan drugs as
well as facilities and treatments tailored to the
affluent, private Chinese healthcare market. For
the longer term, Chinese firms are investing overseas,
looking to manufacture low-cost generic
drugs and acquire innovative products, technology
and know-how to move up the value chain
back home.
“Life sciences investment has been way down
since the recession, in part because the exits are
very difficult,” explains Gail Maderis, president
and CEO of BayBio, a regional association of
more than 800 life sciences companies of all
sizes. She notes that only 14 life sciences IPOs
were launched in 2012, seven of those involving
California companies. “As financing has become
more difficult, especially in the early stages,
we’ve seen a clear business model emerge,
where executives have the knowledge but don’t
have the labs, so they work through contract research
facilities. The other trend is that they have
to partner early to gain financial support because
of the diminishing availability of VC and public
R&D investment.”
That suggests synergies between small and
mid-sized Bay Area life sciences ventures and
Chinese investors, and Maderis acknowledges
that many of her member companies have explored
collaborations with Chinese companies in
the past three years to cover clinical trial research
costs in exchange for rights in China.
The realities in searching for the right China
partner, however, can be complex. In general,
Chinese companies prefer investing at the clinical
stage of co-development, compared to the preclinical
stage, which many consider too early.
Particular opportunities may exist in partnering
between U.S. and Chinese companies to enroll
Chinese patients in clinical trials for conditions
endemic to China or Asia. This may be enabled
by a recent shift by the FDA allowing earlier enrollment
of Chinese drug candidates in clinical
trials. Chinese generic drug companies are
showing particular interest in partnerships or codevelopment
of products with innovative U.S.
companies.
Dr. Jimmy Zhang, greater China lead for licensing,
acquisitions and external research at
Merck & Co., as well as the current chairman of
trade association BayHelix, shuttles back and
forth between China and the Bay Area regularly.
Prior to joining Merck, he was senior vice president
at Synergenics LLC, a professional services
and investment company founded by biotech
pioneer Dr. Bill Rutter of UCSF. While at Synergenics
he brought two early-stage Bay Area
companies—one in diagnostics, the other a
maker of monoclonal antibodies—to Shenzhen
and Hangzhou, respectively.
Dr. Zhang agrees about the natural synergies
between biotech start-ups seeking funding in the
absence of government research funding or IPO
activity in the sector, and Chinese firms—both
state-owned and private—under government
pressure to produce original drugs and medical
devices for the Chinese market in a relatively
short time frame. The Chinese government is also
going out of its way to encourage nimbler private
firms to enter the market and scale up, while municipalities
are competing to attract talent and
investment for new research clusters.
Yet despite considerable interest in developing
cross-border cooperation, real activity has
been slow to build. “Expectations on the U.S. and
China sides are still far apart,” Dr. Zhang suggests.
“The U.S. side wants the cash right now;
China wants a long-term relationship and is not
willing to pay up front; they want a more gradual
development arrangement.” One solution has
been a co-development model for products and
treatments, where each side covers its own costs
and both share the clinical trials data.
Dr. Zhang sees longer-term prospects for foreign
firms on the pharmaceuticals side of healthcare,
since 80–90 percent of innovation currently
takes place outside of China; others place the
number higher—at 95 percent. The medical device
sector has lower barriers to market entry and
lends itself more readily to copying by Chinese
companies that are able to bring products to
market more cheaply and quickly. “There has
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been a saying in the China healthcare market,”
he says. “Look at what GE, Phillips and Siemens
are doing and follow them.”
The good news is that as China’s market
grows and its drugs, distribution and devices
sectors consolidate, there will be a growing need
for overseas innovation, while sales and distribution
networks will become more robust and efficient.
If there is bad news, it is that, over time,
M&A attention will focus increasingly on laterstage
companies, as execution and time to market
become as critical as innovation itself.
Pharmaceuticals: Finding the Right Fit
According to a 2012 report by McKinsey & Company,
China is now the world’s third-largest
pharmaceutical market, with healthcare spending
expected to triple to $1 trillion by 2020. But negotiating
that market presents challenges. Government
pressure is growing, for example, for
foreign companies to discount some of their most
expensive drugs. This recently happened with
Novartis, which reached a negotiated agreement
with the government of Jiangsu province to contribute
three doses of its leukemia drug Gleevec
for each one sold, lowering the cost of an annual
regimen from as much as $100,000 per year to
$12,000. While this cuts into profits, negotiated
discounts of this kind may prove preferable to
compulsory licensing or the denial of patent
protection. In the summer of 2013, Chinese
regulators revoked the patent protecting Gilead
Science’s HIV and hepatitis B drug Viread, in a
move designed to pressure drug makers to offer
lower prices.
Distribution is also a growing but complex
field. Cardinal Health, a Fortune 500 distributor
of healthcare products such as non-capital medical
and laboratory supplies, entered the China
market in 2010 and now has several billion dollars
in turnover annually. Cardinal Health China president
Eric Zwisler notes that China has a welldeveloped
bio-medical manufacturing industry
that includes both pharmaceutical raw materials
and end products and that buys extensively from
overseas companies.
Overall, the dynamics of China’s healthcare
market are strong, with growth based on expenditures
by the government’s health insurance plan
(two-thirds) and private spending (one third).
Market growth, now 15–20 percent per year,
should accelerate to 25–30 percent over the next
ten years. Approximately 80 percent of healthcare
is provided through government hospitals,
the growth of which is limited only by government
funding. As incomes grow, more Chinese
will be able to afford better care, and private services
will grow, but this process will take time and
will focus on the high-end—those who can afford
to pay. U.S. hospitals, health groups and investors
are looking at the market.
The pharmaceutical market—focused on hospitals
and retail pharmacies, with city and provincial
governments holding competitive tenders—is
moving upscale, and in the future will look increasingly
like other international markets; in
other words, multinationals will be able to rely
less on older, generic products. The medical devices
and supplies market is also growing quickly.
Foreign companies face strong competition,
however, from Chinese companies that produce
cheaply and are working hard to move up the
value-added scale. As part of that trend, both
pharmaceutical and devices companies in China
are increasing their focus on overseas investment,
with the goal of developing more competitive
products for the domestic market.
Predictably, the process is complex. Apart
from basic language and cultural barriers, due
diligence is problematic: even large Chinese life
sciences and healthcare firms do not have long
track records in advanced medicine and lack
familiarity with global practices, quality standards
and regulatory processes. Smaller firms
here, with little experience on the ground in
China, rely heavily on consultants and advisors
to screen likely partners in what can be an
opaque market environment.
One overarching concern is intellectual property
protection, which may be at risk when dealing
with Chinese life sciences companies. Industrial
espionage—through data room breeches or IP
theft—is a significant issue for larger U.S. biopharma
companies. This concern lies behind
Merck’s decision to scale back its planned $1 billion
R&D center in Beijing and explains the much
smaller scale of other new U.S. R&D centers. It is
important, therefore, that U.S. companies protect
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Key Industry Sectors
themselves in the due diligence phase of any deal.
Caution is also advisable when accepting Chinese
funding, which may or may not require transferring
or sharing access to IP.
One example of a successful collaboration is
the five-year marketing agreement signed in September
2012 between Emeryville maker of antiinfective
skin and wound care products NovaBay
Pharmaceuticals, Inc. and Naqu Area Pioneer
Pharma Co. Ltd. of Shanghai. Pioneer is paying
$500,000 up front to market NovaBay’s Neutro-
Phase, a solution of disinfectant hypochlorous acid
and saline. It has won FDA approval for some, but
not all, proposed uses. Pioneer Pharma (Singapore)
Pte. Ltd. has committed an equity investment
of as much as $5.5 million over 2012–13, and
will provide contract research support to develop
antibodies for use with non-healing wounds. “Antibody
development can be done at 20 percent of
the cost in China,” says Maderis. “That means you
get five shots at the goal instead of one, in effect
five times the work. That’s driving companies of all
sizes to consider China.”
One such firm is FibroGen, Inc., a San Francisco
biotech company specializing in tissue
growth and repair as well as production of recombinant
human collagens and gelatins. In
2010, FibroGen received approval from China’s
State Food and Drug Administration (SFDA) to
perform Phase 1 and Phase 2 clinical trials for an
affordable oral treatment for anemia associated
with chronic kidney disease (CKD).
The benefits are mutual: one byproduct of
China’s urbanization has been a rise in CKD, as
changes in diet and exercise have increased diabetes
and hypertension, which are risk factors for
the disease. Some 125 million Chinese suffer
from CKD, and 300,000 patients die from it annually.
The disease is often accompanied by
anemia, adding to a patient’s debilitation. Nearly
all terminal patients are anemic, as are an estimated
6–8 million patients not yet on dialysis.
While insurance reform has made dialysis more
accessible and affordable, only 10 percent of
patients are now treated for anemia, due to cost
and the fact that current injectable vaccines must
be clinically administered.
FibroGen has successfully completed Phase 1
trials and dosing in two Phase 2 studies, with
Phase 3 trials in China beginning in 2013. Similar
trials are underway in the U.S., Europe, Japan and
Russia. Other kinds of partnerships and investments
are also significant connections.
Foster City pharmaceutical company SciClone
expanded sales in China of its hepatitis and cancer
drug Zadaxin, as well as other drugs, by acquiring
Chinese drug distributor NovaMed.
While the company has subsequently faced legal
and regulatory challenges, sales have grown from
approximately $85 million in 2010 to over $135
million in 2013. The company currently employs
700 people in China, 15 at its Foster City headquarters
and 10 in Hong Kong.
Mindray Medical International Ltd. of Shenzhen
in June 2013 announced an agreement to
acquire Mountain View ultrasound imaging technology
firm ZONARE Medical Systems, Inc. for
$105 million. ZONARE offers high-end imaging
and sales and marketing channels in the U.S,
Canada, Scandinavia and Germany. Mindray
contributes efficient engineering and manufacturing
platforms capable of bringing down costs
and expanding ZONARE’s global reach.
Tianjin-based Andon Health Co.’s iHealth unit,
which manufactures digital personal healthcare
products, has established an R&D lab in Mountain
View. The company produces a home blood
pressure testing system that measures blood
pressure through an arm cuff that transmits the
results to an iPhone, iPad or iPod Touch through
an app. Future products include a similar device
to measure blood glucose levels.
In March 2013, BGI-Shenzhen, a group of research
institutes and commercial gene sequencing
application firms in the medical, environmental and
agriculture sectors, finalized acquisition of Complete
Genomics, a Mountain View company
known for its “sequencing-as-a-service” mapping/sampling
technology used in disease prevention,
diagnosis and treatment. Prior to the
acquisition, BGI had to do its own sequencing on
equipment purchased from competitors in the
space. Complete Genomics offered sequencing
for as little as $5,000 per genome for volume
orders to build a market presence, but struggled
financially at those rates, eventually laying off
employees and hiring an advisor to explore strategic
alternatives.
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Ties That Bind, 2014 Edition
The $117.6 million offer price from BGI represented
an 18 percent premium over the Complete
Genomics share price when the offer was accepted
in September 2012. The acquisition was cleared by
the U.S Committee on Foreign Investment in the
U.S. (CFIUS) and the Federal Trade Commission
(FTC) following a complaint from San Diego-based
Illumina, a market leader in sequencing machines
and BGI’s former supplier. Complete Genomics
will continue to operate in Mountain View as a
separate company.
In December 2012, Biorichland LLC, a publicly
traded Chinese holding company that owns
China’s largest contract research organization and
pre-clinical laboratory, JOINN Laboratories, paid
$50 million to acquire the 53-acre East Bay Berlex
research facility site most recently owned by
Bayer Healthcare Pharmaceuticals. Berlex, until
2006 a unit of Schering AG, had expanded the
Richmond site to include 355,000 square feet of
lab, manufacturing and administrative space and
had hired 300 employees to work on cancer and
immune-based disease drugs. Bayer bought
Schering in 2006, moved its research activities to
Mission Bay in San Francisco and by 2010 had
phased out the Richmond operation.
JOINN was formed in 1995 in Beijing to perform
drug screening, safety evaluations, animalbased
clinical trials, efficacy studies and registration
for clients in China, Europe and Japan. It has
facilities in Beijing and Suzhou, as well as an office
in Maryland, adjacent to FDA headquarters, that
provides clients with technical consulting on FDA
compliance. Plans for the Richmond property, to
be called the JOINN Innovation Park, include a
bioresearch center, contract research facilities and
a biotech incubator, with a combined estimated
workforce of up to 500.
Hanhai-Zibo Life Science Park opened in June
2013 in Burlingame (see the Investment section of
this chapter), with combined funding and technical
support from Hanhai Investments and China’s Zibo
New & High-Tech Park industrial development
zone. Six life sciences companies from that zone
have a presence in the Burlingame facility, including
Xinhua Pharmaceutical, SHINVA Medical,
Jinjing Group, Jincheng Pharmaceutical and
Chemical, Jinyang Pharmaceutical, and Fushan
Group. The park hopes to attract Bay Area life
sciences start-ups with offers of funding support,
shared lab space and China connections, possibly
to do collaborative work.
Firms have expressed interest in incubators, but
some are wary. Early stage funding help and affordable
shared facilities are needed; life sciences
incubators are proliferating, offering the best startups
a range of choices. Bay Area entrepreneurs are
tempted by the idea of collaboration with China,
but they remain concerned about intellectual
property protection. “It’s still a relatively new area
for our companies; we’re feeling our way as we
go,” says Maderis. “The opportunities with China
are huge, but businesses are being cautious. They
need a comfort level; what they want to see more
than anything is greater transparency up front.”
QB3 has pioneered life sciences incubation in
the region through multiple locations of its highly
successful “Garage.” In recent years, QB3 has
been courted by both Chinese tech parks and
universities to help establish incubators, but there
have been few results so far. The challenge is that
early-stage incubation of the kind supported by
QB3 is too small for most tech parks, and Chinese
universities are adept at catch-up innovation but
are not at the same level as UCSF in generating
cutting edge, disruptive innovation. QB3 director
Regis Kelly also notes that while Chinese partners
are anxious to draw on QB3’s expertise, reciprocity
has been limited. Though the Chinese have
yet to respond, he points to joint research as a
way forward and is continuing to explore opportunities:
“I’m an optimist, and keep going back.”
INVESTMENT
A Two-Way Street
Cross-border investment funds encountered a
radically changed environment coming out of the
global recession, as cash remained on the sidelines,
central bank easing kept interest rates and
yields low, and investor skepticism of Chinese
shares deterred new IPOs and, with them, venture
and private equity exits.
In China, slower growth and an overhang of
public and bank debt and tighter government
curbs on speculative real estate deals, bank
lending and public listings have combined to
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Key Industry Sectors
narrow investment options. China attracted
$111.7 billion in new foreign-invested enterprises
(FIEs) in 2012, down 3.7 percent from a record
$116 billion in 2011, according to China’s Ministry
of Commerce. The number of FIEs declined
by more than 10 percent.
Domestic Chinese RMB venture and private
equity investment has been growing. In 2011, Chinese
domestic VC investment totaled $7.8 billion,
according to Asian Venture Capital Journal, for the
first time passing foreign VC fund investment,
which amounted to $7.4 billion. And while private
equity deals doubled in value over 2009–11, foreign
fund investment fell by 45 percent.
U.S. listings of Chinese companies are only
now beginning to recover from a rash of “reverse
IPO” listings in 2009–10, which were associated
with accounting irregularities. Reverse IPOs, or
reverse mergers, circumvent the formal IPO listing
process by taking over an inactive U.S.-listed
company and merging the shell with a private
Chinese company so that the private entity assumes
control and can raise funds in equity markets
with less transparency up front. Over 2007–
11, more than 150 Chinese companies with a
combined market capitalization of $12.8 billion
entered U.S. financial markets through reverse
IPOs, versus 50 companies using traditional IPOs.
In 2011, nearly 20 reverse IPO firms saw their
shares plummet amid allegations from hedge
funds and other short sellers that they had falsely
inflated valuations.
Skepticism was not limited to U.S. shares. In
October 2012, the China Securities Regulatory
Commission (CSRC) imposed a freeze on initial
public offerings on the ChiNex, a NASDAQ-style
exchange set up for small-cap and mid-cap tech
growth companies. The freeze was imposed to
address market volatility and concerns that many
listed firms were weaker than initially assessed. A
planned July 2013 lifting of the moratorium was
delayed as implementing rules are written; more
than 80 companies have IPO applications pending.
A market recovery is suggested by three successful
Chinese IPOs in the tech space: online
retailer Vipshop Holdings, Ltd. and social media
network YY Inc. in 2012 and LightInTheBox
Holding Co., another online retailer, in 2013. Still,
LightInTheBox has been the only Chinese IPO in
the U.S. thus far in 2013, down from three in
2012, 11 in 2011 and 38 in 2010, according to
Bloomberg data.
In China, foreign investors have adopted a
defensive posture, focusing on offshore investments
that allow earnings repatriation and that,
through structures such as variable interest entities
(VIEs), allow greater investor control through
a minority interest—although government reserves
the right to intervene.
Unable to fully compete in the domestic Chinese
RMB market, many investors are reconsidering
strategic benefits offered by “greater
China”—financial services in Hong Kong, and
tech manufacturing and IP protection in Taiwan—
that leverage the mainland market.
PRC investment flows, guided by the Five-Year
Plan, reflect broad, long-term trends in Chinese
society—an aging population requiring more
advanced healthcare; urban migration and its
environmental impacts; emerging middle-class
consumer needs and expectations; the rise of
mobile Internet; and the need for cleaner, reliable
supplies of energy, food and water.
Chinese FDI in the U.S.:
A Complicated Environment
Meanwhile, Chinese investment in the U.S. has
grown steadily, setting new records every year
since 2009 and increasing from $5.8 billion in
2010 to $6.7 billion in 2012 and $4.7 billion in
just the first half of 2013, according to business
consultancy Rhodium Group. While deal volume
has tapered, total deal value is up. Private Chinese
enterprises (as opposed to state-owned
enterprises) account for a growing share of foreign
direct investment (FDI).
Well-known deals include Wanda Group’s $700
million purchase of Kansas City movie theater
chain AMC Entertainment Holdings; Wangxiang
America Corp.’s $257 million buyout of battery
maker A123 Systems; BGI-Shenzhen’s $118 million
takeover of Mountain View-based Complete Genomics
(see the Life Sciences/Healthcare section of
this chapter); and the $4.7 billion Shuanghui International
Holdings purchase of Smithfield Foods.
A number of deals have also fallen through
due to strategic concerns, prompting greater
caution and due diligence among Chinese
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Ties That Bind, 2014 Edition
investors: state-owned oil producer CNOOC’s
proposed $18.5 billion dollar acquisition of Unocal
Corp. in 2005; Superior Aviation Beijing Co.’s
2012 bid to buy Hawker Beechcraft’s civilian aircraft
assets for $1.8 billion; and the proposed
development by construction company Sany of a
solar wind farm in Oregon at a site near a classified
U.S. Navy installation.
Over the long term, global expansion will be
critical for large Chinese companies seeking a
stronger global profile. Only a few Chinese companies
so far have broken through to achieve
recognition as global brands, among them
Lenovo, Haier and Huawei. The most prominent
example may be Lenovo, which purchased IBM’s
personal computer business in 2005. Lenovo created
dual headquarters, in Beijing and Morrisville,
North Carolina, where the IBM unit was located,
and made English the company’s official language.
Since then, ThinkPad sales have doubled,
while profit margins have been maintained a
healthy 5 percent.
For most Chinese firms, FDI in the U.S. is
aimed at achieving scale, vertical integration and
technical expertise. For the U.S. partner, acquisition
typically brings a fresh injection of capital,
and improved access to Chinese markets.
The successful acquisitions of Complete Genomics
and A123 Systems reflect a pivot in Chinese
strategy toward deals valued at less than
$500 million; joint ventures, partnerships and equity
stakes rather than outright acquisitions; a focus
on privately held versus publicly traded firms; and
avoidance of companies and technologies where
there are potential security-related issues.
Investment into China: The New Normal
FDI into China is generally thought to have
reached a plateau, given slower GDP growth,
currency controls, rising production costs, intellectual
property and transparency issues, and
political risks. “The good news is that due diligence
has gotten easier if for no other reason
than experience,” says Deloitte & Touche LLP
partner Chris Cooper, who serves as Americas
leader of Deloitte’s Chinese Services Group.
“We’ve got lots of people on the ground with the
knowledge and the tools to bridge the gaps that
exist between the U.S. and China, including types
of advisors we never had before—the returnees,
the sea turtles.”
At the same time, Cooper says, recent years
have brought increased uncertainty. “There are
things we think about a lot because our clients
do, because of the risks involved—the transition
of power, pervasive corruption, the China-Japan
conflict, the flattening of the Chinese economy
and how it affects business.” To those he adds
higher land and wage costs, high turnover and
labor unrest, IP concerns, tightening liquidity resulting
from the shadow banking system, and
difficulties shifting from an export to a consumption
economy.
To attract fresh capital, China raised investment
limits under its Qualified Foreign Institutional
Investor (QFII) program, developed in 2002
to allow licensed foreign investors to buy and sell
yuan-denominated A shares on the Shanghai and
Shenzhen exchanges. QFII sets size, governance
and other requirements for investors, as well as
investment limits. The limit on total QFII investment
was raised from $30 billion to $80 billion in
April 2012, and again to $150 billion in mid-2013.
The quota for RQFII investment in mainland
shares using renminbi held offshore was raised in
April 2012 from $20 billion to $44 billion, and in
2013 QFIIs holding renminbi in Singapore, Taiwan
and London were permitted to reinvest
those funds directly into China, rather than via
Hong Kong.
QFII has so far attracted just $43 billion and
the RQFII program has attracted RMB 105 billion
($17 billion). Foreign investors account for 1.6
percent of total China market capitalization. At
the same time, a large share of RMB investment
growth is in structured wealth management
products (WMPs), high-yield securities made up
of troubled loans moved off bank balance sheets.
“Our strong sense is that there’s an awful lot of
stress right now in the way wealth is concentrated
in China,” Cooper says. “It’s also obvious from
the economic data that wealth has been exiting
China at an accelerating rate.”
Experienced investors and fund managers in
China, foreign and domestic, continue to see potential
in well-managed small and mid-sized companies
with the capability to scale up and become
national or global brands; in a more sophisticated
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Key Industry Sectors
retail sector to serve a growing and aspirational
middle class; and in technological advances in
growth sectors such as healthcare, energy, environmental
mitigation, agriculture and an expanded
and improved supply chain/logistics infrastructure.
San Francisco-based private equity firm TPG
Capital has invested more than $6 billion in Asia
since 1994. It has exited some 30 of 50 investments
to date, earning 2.5 times the value of the
initial investments. TPG was an investor in
Lenovo’s acquisition of IBM’s PC manufacturing
business in 2005. Its Newbridge Capital unit acquired
an 18 percent controlling interest in
Shenzhen Development Bank as part of a government-approved
turnaround effort. Newbridge
exited in 2009, selling its stake to Ping An Bank
for Ping An shares valued at $2.44 billion.
TPG Capital senior partner Tim Dattels sees
bargains in China even as the environment becomes
more challenging. There are fewer buyout
opportunities, mainly state-owned enterprises and
family or entrepreneur-owned businesses; offshore
banks are unwilling to lend against onshore assets;
Chinese banks are already overextended through
government-directed, non-performing loans and
high-risk private banking products; and there were
only 24 Chinese IPOs in the first half of 2012, half
the number for the first half 2011, even before the
ChiNex exchange stopped accepting new listings.
Dattels points to China’s 4.3 million small and
mid-sized businesses that account for 60 percent
of GDP and 75 percent of jobs and have trouble
getting financed. “There’s a lot of capital in China
but it’s misallocated,” Dattels says. “With so many
entrepreneurs and capital so restricted, it creates
opportunities for private equity.”
In 2012, TPG acquired HCP Holdings, a Taiwan
packaging company for the cosmetics, skin
care and fragrance industries that had moved its
manufacturing to Suzhou. The $500 million purchase
price made HCP the largest leveraged
buyout to date in China. The plan is to scale up
the firm’s operations to compete globally. TPG
also teamed with Singapore sovereign wealth
fund GIC, investing $120 million in a turnaround
of Beijing-based sneaker and sportswear maker Li
Ning. It has recently put up for sale UniTrust Financing
and Leasing, a Shanghai equipment lessor
that it acquired in 2008 for $275 million, with
an asking price of $800 million. Other investments
include China Grand Auto, the world’s
largest car dealership, and shoe retailer Daphne.
Lee Ting has viewed China through both the
venture and private equity lenses, as a managing
director, general partner and advisory director at
WR Hambrecht + Co since 2003, and more recently
as an advisor to Singapore-based private
equity firm Novo Tellus Capital Partners. He is
also an independent director with Lenovo Corp.
Hambrecht’s funds have been fully invested
for several years and focus on technology, including
companies such as Lenovo and PayPal.
He says the old model of looking for disruptive
technologies that can be applied in key Chinese
industry verticals at huge scale to emulate advances
in the U.S. is much more difficult today.
The China market is less dependent on foreigners
and returnees to provide management and technical
expertise or access to venture capital; often,
local entrepreneurs can provide solutions more
closely attuned to consumer tastes and industry
needs, and they have connections to proliferating
domestic VC funds.
“Being a local company does provide a certain
advantage over a foreign competitor, even if the
foreign company is larger and more established,”
Ting explains. The difference begins with language
and cultural differences in the way people
use and interact with technology, he adds, but it
doesn’t end there. “Local Chinese companies
move much faster than multinationals. Local capabilities
from a technology standpoint have also
improved a lot.” They also have the RMB capability
and government connections to execute
large onshore SOE deals.
In the healthcare space, Ting sees opportunity
in Chinese contract research organizations
(CROs) doing clinical trials, and in compounding
laboratories that can partner with global pharma
and innovate for the China market. “The government
is making a huge push,” he says. They
know they can’t continue to depend on westernstyle
drugs: they’re too expensive. With more
original research, their own scientists can start to
uncover new compounds and find medicines
more tailored to Asian populations.” He cites as
an example the fact that western cancer research
focuses heavily on breast and prostate
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Ties That Bind, 2014 Edition
cancer while stomach cancer has much higher
rates in Asia but is neglected.
In general, Ting says, the investment landscape
remains lucrative but more complicated: IPOs are
off the table until a later stage when a company
has proven it is a real business and has scale, recurring
customers, cash flow and profitability; M&A
remains a challenge either because of government
restrictions or difficulties agreeing on valuation,
especially with firms not already publicly traded;
and slower economic growth suggests smaller
returns over a longer period of time.
Hanson Li, head of investment banking and
private equity firm Hina Group’s San Francisco
office, concedes that the investment field is
crowded. “The biggest change in the last five
years is the available capital that has entered the
market from both outside and within China,” he
says. “On the corporate side, companies are
more sophisticated; enough people call and you
realize you can pretty much take your pick from
the outside capital.”
In pure technology, Li sees growing investor
interest in biotech, particularly given the small
number of Chinese companies in software and
the increasing commoditization in semiconductors.
Other investment targets are in healthcare,
retail, energy, agriculture and real estate, as well
as services like hospitality, insurance and logistics
tied to a booming online retail sector.
Recent Hina investments focus on “copy-me”
companies in China that in many cases replicate
Silicon Valley firms that bring scale and disruptive
technology to key service sectors. A Groupon
copycat is part of the company’s current portfolio,
as is a cleantech firm that helps utilities optimize
energy usage for enterprise and retail customers,
and a niche high-end travel agency offering services
to affluent customers that indigenous agencies—often
spinoffs from SOEs—can’t match.
In 2011, Hina opened its own RMB fund, out
of necessity. “In the domestic exit market of
2007–11, it was possible for a small company to
go public in China,” Li recalls. “If you looked at
the amounts U.S. dollars funds were raising, it
was staggering. At the same time, China was encouraging
the development of a structured RMB
market that offered speedy deployment of capital
with fewer restrictions.” With the government
encouraging the development of a stronger Chinese
private equity sector, and restrictions on the
ability to do IPOs in China with USD funds, the
incentive to create an RMB fund was there.
Among the major Bay Area venture investments
in Chinese companies are the following.
Kleiner Perkins Caulfield & Byers has funded
some 60 Chinese companies, most notably Baidu
and Alibaba.com. Target sectors range from cleantech
(environmental products firm Universtar; solar
and wind power inverter maker Sungrow; water
treatment technology company Scinor Water) to
advertising (mobile ad firms Madhouse and Limei;
advertising data mining company Miaozhen Systems)
to life sciences (testing laboratory services
firm Kindstar Global; orthopedic implant and instrument
maker KangHui; biology CRO GenScript)
to business and consumer services (China Auto
Rental; B2B travel service Intohotel).
Since 2003, New Enterprise Associates has invested
some $400 million in more than 20 China
companies focused in three fields: IT, healthcare
and energy technology. It has funded mainland
chip foundry Semiconductor Manufacturing International
Corp. (SMIC); digital wireless chip designer
Spreadtrum; healthcare provider HYGEIA
Medical Services Group; e-commerce platform
Redbaby, China’s largest multi-channel direct consumer
products marketer; and China’s leading
green lighting company, Shenghui Lighting.
San Francisco-based IDG Ventures has made
VC and private equity investments in China
through its IDG Capital Partners affiliate since
1992. IDG Capital Partners, with $2.5 billion
under management, invests in the $1 million to
$100 million range, at all stages of the company
life cycle. It has successfully exited 60 investments
through M&A and IPOs in the U.S., Hong
Kong and China A-shares markets. Portfolio
firms include real estate portal SouFun, online
travel service Ctrip, game developers G-bits and
NetDragon, chain retailer WuMart, online retailers
VANCL and Dangdang, medical device maker
Andon Health, orthopedic implant developer
KangHui and advanced battery nanotech company
CNano Technology.
Sequoia Capital manages eight dollardenominated
China funds with a combined value
of $2.5 billion, plus the equivalent of another
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Key Industry Sectors
$640 million in RMB funds. Sequoia focuses on
high-growth companies at all stages, with a
portfolio that includes school test preparer and
admissions consultants Beijing Wanxue Education
Technology; car rental firm Reocar; social networking
site 51.com; micropayment solutions firm
19pay.com; LED lighting/solar cell producer
Changelight; medical sterilization/purification device
maker Laoken, municipal waste treatment
firm CSO Environmental Protection; and hematological/cardiovascular
drugs maker Nuokang.
Most recently, Sequoia, GGV Capital, NLVC and
Steamboat Ventures have invested $50 million in
Chinese mobile entertainment startup Chukong.
Draper Fisher Jurvetson’s China portfolio includes
a range of investments beginning with early
positions in Baidu online payment platform
YeePay, and advertiser Focus Media. Other portfolio
firms include Jing-Jin Electric, a maker of highperformance
motors and drive trains for hybrid and
plug-in electric cars; online shoe retailer OkBuy;
and sports and entertainment portal UUSee.
California: U.S. Trade Dollars
Return Home
It was only a matter of time before some of
China’s $3.4 trillion in foreign exchange reserves—largely
export earnings—began to migrate
out of U.S. treasury securities and bonds
and into outbound foreign direct investment
(FDI). The strategy began with the 2007 creation
of China’s sovereign wealth fund, the China Investment
Corp., and continues with the May 2013
opening of a State Administration of Foreign Exchange
(SAFE) office in New York.
SAFE oversees China’s foreign exchange
reserves, and the new office is charged with accelerating
China’s diversification from U.S. government
securities to alternative U.S. assets such
as property and infrastructure.
“The U.S. has always been very underinvested,”
says Hanson Li of Hina Group. “It’s a
difficult place to deal with relative to other places
in the world, but about four years ago we started
to see interest from Chinese companies in business-oriented
assets overseas. That interest has
really picked up in the last 12–18 months, as Chinese
conglomerates, and even mid-sized companies,
are looking to scale up.”
Outbound foreign FDI from China is a relatively
new phenomenon. In 2005, Chinese buyers—almost
exclusively state-owned firms—made
$12 billion in non-financial investments outside
the country; in 2012, the total passed $77 billion.
Overseas investment has grown for a variety of
reasons: China’s need for energy, minerals and
agricultural commodities; government strategies
to build national champions that can compete
globally; and firms extending their reach to gain
technical and business expertise and an edge on
competitors back in China.
As noted above, Chinese FDI in the U.S. has
been rising steadily, setting new records every year
since 2009. The scale of transactions has also increased
in that time, from small tech acquisitions
and equity stakes to large-scale M&A. Accordingly,
total deal volume has moderated as the total value
of deals has continued to rise. As the mix has
shifted to larger, more complex transactions, the
share accounted for by private Chinese firms has
grown to 80 percent of transactions by number
and 50 percent by value in 2012.
California accounts for the largest number of
Chinese investment transactions of any U.S. state;
New York, however, accounts for a larger share of
Chinese investment by value. This may reflect the
fact that capital-intensive investments in manufacturing
or resources tend to flow to less expensive
jurisdictions, while California attracts more investment
in smaller, innovative companies. New York’s
numbers are also high due to Lenovo’s acquisition
of IBM’s laptop business, a particularly large transaction.
The principal drivers of Chinese investment
in California—apart from real estate—are market
access and the development of strategic assets,
defined as brands, technology and knowledge,
that can enable Chinese companies to penetrate
markets and advance up the value chain.
Rhodium Group reports cumulative Chinese
FDI in California for 2000–11 of 156 deals valued
at more than $1.3 billion, of which $463 million,
or 35 percent, was in the Bay Area. Another 20
deals worth $800 million were done in 2012 and
the first half of 2013. Investments in California
were spread across a range of sectors—software
and IT; consumer electronics; semiconductors;
leisure and entertainment; food; transportation;
pharmaceuticals; healthcare; and aerospace—
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with a focus on value-added services, either
upstream (R&D) or downstream (supply chain,
branding, after-sales service) from the core manufacturing
processes in which Chinese investors
are already strong. Large greenfield investments
were located primarily in the Los Angeles and San
Jose areas; M&A was spread throughout
Southern California and the Bay Area. Key deals
were done in the Internet, electronics and solar
energy sectors.
Internet
Shanda Games acquired San Francisco-based
flash gaming ad network/payment platform
Mochi Media for $80 million in 2010.
Online gaming operator Perfect World Co. Ltd.
acquired Los Gatos game developer Cryptic
Studios from Atari in 2011 for $50 million.
In 2010, e-commerce portal Alibaba.com
bought majority stakes in Auctiva (Chico) and
Vendio Services (San Mateo), two developers
of software tools to help customers list and
sell on eBay.
Electronics
Microprocessor manufacturer MEMSIC Semiconductor
purchased the non-military inert
sensor and wireless sensor business lines of
Milpitas-based Crossbow Technology for
$18 million in 2010.
China WLCSP, a wafer-level chip packaging
and testing supplier for the mobile and RFID
markets, opened an R&D center in Sunnyvale
in 2011.
Solar Energy
Yingli Green Energy’s Yingli Solar unit opened
a solar R&D lab in South San Francisco in 2011.
LDK Solar acquired a 70 percent stake in
Sunnyvale vertically-integrated solar developer
Solar Power, Inc. in 2011, a deal that included
LDK’s assumption of control over operations of
a manufacturing facility in Shenzhen.
GCL Solar, a solar project developer, which
opened an office in San Francisco in 2009,
currently has 300 megawatts of solar projects
under construction.
Most recently, Chinese web companies are
expanding their footprint. In 2013, social networking
and gaming company Tencent Holdings,
with $5 billion in cash reserves, led a $150 million
investment in ecommerce company Fab.com,
and Alibaba Group Holdings led a $206 million
investment in ShopRunner.com, which provides
services similar to Amazon. Alibaba established a
U.S. investment group based in San Francisco in
2013. Tencent’s offices in Palo Alto actively scout
for investment prospects, wielding a $760 million
fund for emerging companies that was created in
2011. The company subsequently invested in
venture firms such as Andreessen Horowitz and
SV Angel, giving it early access to emerging startups.
In 2012, it acquired majority ownership in
game maker Riot Games for $231 million and a
minority stake in Epic Games for $330 million.
Both Alibaba and Tencent’s formidable market
caps are enabling their respective moves to go
global, with the help of Silicon Valley start-ups.
Beyond Tencent and Alibaba, a growing range
and number of Chinese firms have opened offices,
R&D centers and/or sales and support presences
in the Bay Area. Among these are China’s
three major telecom providers China Unicom,
China Telecom and China Mobile; equipment
makers Huawei Technologies, ZTE Corp. and
Spreadtrum; search engine Baidu; web portals
Sina and Sohu; solar module firms Trina Solar,
Jinko Solar and Yingli Green Energy; Bank of
Communications, Nanyang Commercial Bank and
Industrial and Commercial Bank of China; computer
maker Lenovo; airlines Air China and China
Eastern, plus Taiwan’s China Airlines and Hong
Kong’s Cathay Pacific; container shipping lines
COSCO and China Shipping; Andon Health Co.’s
iHealth unit; and the Jun He law firm.
More than 80 Chinese companies belong to
the Chinese Enterprise Association, a Bay Area
trade association that mainly helps Chinese firms
locating here navigate the business, regulatory
and cultural environment (see section on Professional
Networks).
West Summit Capital, with offices in Beijing,
Hong Kong and Palo Alto, is a cross-border investment
firm with 13 portfolio companies and
approximately $300 million under management.
Its focus is on growth-stage companies with $10
million or more in annual trailing revenue, more
than 20 percent revenue growth, and a proven
business model, mainly in China or the U.S., in
the technology, new media or cleantech sectors.
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Key Industry Sectors
A major investor at West Summit’s inception
was sovereign wealth fund China Investment
Corp. (CIC), which was the sole investor in its first
fund and an anchor investor in its second. But
West Summit managing director David Lam says
investments are not strategically (government)
directed. “We invest in Chinese companies to
help them connect with the rest of the world,” he
explains, “and we invest in companies outside of
China, mostly in the Bay Area, serving as a strategic
partner to connect them to business expansion
in China. All of our efforts go into building
great companies that derive returns.”
Lam, who previously was managing director at
VC firm W.I. Harper and vice-president at global
private equity firm The Carlyle Group, says West
Summit seeks out established companies poised
for growth, typically in the enterprise space rather
than the consumer side, with technology already
embedded in a viable product. Enterprise software
is perhaps the weakest area of China’s tech
sector and is also an attractive market for innovators
because programs and applications cannot
be replicated quickly.
An example of the possible synergies is Danish
online 3D game platform, Unity Technologies,
in which Summit invested. It moved the
company headquarters from Copenhagen to San
Francisco to build a larger developer community,
then opened a studio in Shanghai and partnered
with Qihoo to add its anti-virus software and support
to the platform. Asia revenues have more
than doubled since 2011.
That said, Chinese investors remain heavily
hardware-focused because it is what they know.
“China consumes more than half the chips used in
the world, so a lot of investment is still around that
ecosystem,” Lam says. Four West Summit portfolio
companies are in the semiconductor space; another
three are in cloud computing and storage.
Other West Summit Bay Area investments
include Accent, a Palo Alto system-on-chip designer
and manufacturer for the smart grid sector;
Mountain View cloud computing/software-asa-service
platform Mirantis; San Jose multi-core
processor developer for cloud computing Tilera;
Santa Clara cloud storage software developer
Nexenta Systems; Mountain View social media
data analytics firm NetBase; and Redwood
City multi-screen digital advertising solutions provider
Yume.
Location, Location, Location
Real estate is becoming an increasingly important
draw for Chinese investors, throughout the U.S.
but particularly in the Bay Area. For Chinese investors,
the U.S. real estate market has few barriers
to entry. In China, slowing economic growth is
prompting companies and investors to accelerate
their globalization plans, both to access new markets
and technology and to diversify risk. Recent
U.S. acquisitions have ranged from high profile
properties in Manhattan to distressed commercial
buildings and hotels that are in default or need
turnaround capital. The San Francisco Bay region
is a natural destination, but investors face a
learning curve regarding entitlement, disclosure
and other complexities in U.S. law.
Hong Kong investors have long been active in
commercial real estate in San Francisco. For example,
the Great Eagle Group, a major global
investor in commercial, retail, and residential
properties through San Ramon-based Pacific
Eagle Holdings, owns the 353 Sacramento Street
tower in San Francisco’s financial district and recently
acquired 123 Mission Street, a 29-story
building currently occupied by Salesforce.com
and McKesson Corp.
Recent transactions highlight the Bay Area’s
attractiveness for development, most notably in
housing, office parks and tech incubators, hotels
and infrastructure. An early acquisition was Chinese
investment firm Upsky Enterprises’ purchase
in 2011 of the 309-room 10-story Crowne Plaza
Hotel near San Francisco International Airport.
Yorbarn Investments, a Chinese investment group
specializing in boutique hotels, has announced
plans for its first hotel in the United States at 1409
Sutter Street in San Francisco, investing $3.5 million
in design and build-out. Chinese investors
have also acquired office buildings in San Francisco
and Milpitas and the largely-vacant Silicon
Valley office park that was at once the headquarters
of Borland Software.
One of China’s largest publicly-listed developers,
China Vanke, is teaming with New York
construction firm Tishman Speyer to build two
high-rise residential towers of 37 and 42 stories
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Ties That Bind, 2014 Edition
in downtown San Francisco at a site adjacent to
the new Transbay Terminal. The 655-unit project
is expected to cost $625 million, including $175
million from China Vanke and $75 million from
Tishman Speyer.
And in a $1.5 billion investment partnership
deal announced during Governor Jerry Brown’s
April 2013 China trip, Chinese property developer
Zarsion Holdings Group Co., Ltd. has become
a co-developer in the Brooklyn Basin project
(formerly known as Oak-to-Ninth), a 65-acre
former industrial property on the Oakland waterfront
where local developers Signature Development
Group and Reynolds and Brown plan to
build a new neighborhood of 3,100 residential
units and 200,000 square feet of retail space, with
a 200-slip boat marina and 30 acres of parks and
open space. Zarsion has committed an initial $28
million for infrastructure and environmental
cleanup for the first phase of the development,
with more to follow as the project proceeds.
Developers concluded the $18 million purchase
of the land in June 2013 from the Port of
Oakland and the State Lands Commission, and
project build-out will take an estimated 15 years,
beginning in 2014. Signature was introduced to
Zarsion through a UC Berkeley connection:
Oakland Mayor Jean Quan and Bay Area attorney
Bruce Quan (no relation), now a professor at
Peking University and a Zarsion partner, were
classmates. Zarsion was looking to diversify to
other markets with different business cycles and
toured the U.S. looking for projects. When
Brooklyn Basin was selected, local attorneys and
accountants were hired to advise on the transaction.
Funding is now going into demolition,
remediation and site improvement, with further
infusions to follow. Zarsion now has a permanent
three-person office in the region and is looking
to grow its U.S. portfolio. For many years the
Oak-to-Ninth project had languished due to the
lack of investors; Brooklyn Basin is expected to
bring new residents and energy to the Oakland
waterfront and contribute to the revitalization of
the city’s downtown.
Not every deal works. A similar proposal, involving
a $1.7 billion five-year loan by China
Development Bank for two large development
projects at San Francisco’s Hunters Point Shipyard
and Treasure Island—involving 12,500 housing
units, office and retail uses and open space—did
not go forward in 2013 despite a memorandum
of understanding signed in 2012 between the
bank and developer Lennar Corp. This experience
points to the complexity of navigating
China’s investment environment, where political
support, finding the right partner, and aligning
interests can be essential.
Second Home
Residential investment by private individuals is also
increasing. Over 2007–12, National Association of
Realtors data reported by Rhodium Group shows
that Chinese buyers increased their share of total
U.S. home purchases from 5 percent to 11 percent,
ranking second among foreign buyers behind
only Canadians, and potentially contributing as
much as $1 billion in 2012 capital inflows to California.
Real estate services firm Jones Lang LaSalle
sees residential property investment by high net
worth Chinese (those with 10 million yuan, or $1.6
million in assets) particularly growing. As reported
by China Daily, the most popular offshore destinations
are the United States, Canada, Australia and
the U.K. Considerations for these investors include
asset diversification (security), establishing an overseas
anchor for the family, and the potential for
appreciation—down payments can run as high as
30–50 percent in major Chinese cities, compared
to the U.S. where 20–25 percent is the norm and
interest rates are low.
Start-up Stimulus
Cross-border start-up incubators and accelerators
have emerged as another potential growth area
for Chinese investment. Some have tacit or direct
government support and are intended to
provide seed funding and technical support to
Chinese-born entrepreneurs in the U.S. and to
U.S. start-ups looking to engage in China.
Incubators typically house applicant start-ups,
offering low-cost office and/or lab space in exchange
for equity or as a straight rental arrangement.
The length of time a company may stay in
the incubator is flexible, up to a maximum cap.
Most facilities offer add-on support services
such as business mentorship and training, networking
events, and introductions to investors.
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Key Industry Sectors
Brooklyn Basin
Accelerators accept for a fixed period small
teams from applicant companies that are usually
beyond the start-up stage. Like incubators, they
offer business mentorship and training immersion
programs that may or may not involve shared
workspace; founder applicants are typically provided
with seed funding and a convertible note in
exchange for equity upon successful completion.
The model began in 2005 with Y Combinator, a
Mountain View accelerator launched in 1998.
In all, the Bay Area is home to more than 60
incubators and accelerators of various kinds, primarily
serving tech and life sciences start-ups.
Chinese participation in this space is relatively
new, often with unique characteristics—beginning
as a commercial real estate investment, possibly
with strategic tie-ins to Chinese science and
technology parks or a China-focused source of
capital. Consistently, the goal is to facilitate crossborder
linkages of entrepreneurs and companies
and access to technology and innovation.
The first of these accelerators was InnoSpring,
a 13,500-square-foot facility opened in Santa Clara
in April 2012. Partners in the venture include
Tsinghua University Science Park (TusPark), property
developer Shui On Group, China-focused
VC firm Northern Light Venture Capital and Silicon
Valley Bank. InnoSpring offers six-month
Source: Signature Development Group
“pre-seed” and “post-seed” programs that include
a mix of services and support with funding,
mentoring, workshops, in-house accounting and
paralegal advice, and venture/angel investor
contacts, plus physical office space and related
services. Post-seed companies can also connect
with and obtain workspace at satellite offices of
larger firms in related fields.
InnoSpring has also established a seed fund as
part of its program through which start-ups receive,
upon acceptance, $25,000 plus an additional
$250,000 upon completion. In return, the
accelerator takes a 1 percent to 5 percent equity
stake in the company. Seed fund partners include
Kleiner Perkins Caulfield & Byers, Northern Light,
GSR Ventures, China Broadband Capital and
TEEC Angel Fund. As of May 2013, InnoSpring’s
seed fund has invested $2 million in 12 firms accepted
from among 300 applicants.
Portfolio companies have included lownoise/low-power
integrated circuit maker Accusilicon;
mobile-to-mobile file-sharing technology firm
Dew Mobile; mobile security app developer
TrustGo, a Silicon Valley start-up with a Chinese
founder; Empower Micro Systems, a designer of
power inverters for energy storage and electric
vehicles; Lex Machina, a data analytics firm that
uses big data to search and analyzes intellectual
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Ties That Bind, 2014 Edition
property litigation for law firms, businesses and
public interest groups; and OncoHealth, a maker
of protein marker diagnostics to screen for and
diagnose cervical cancer.
The 80,000-square-foot Hanhai Z-Park, opened
in San Jose in June 2012, manifests China’s growing
focus on innovation-led economic growth and
on attracting overseas talent. The facility is a joint
venture of Beijing Hanhai Zhiye Investment Management
Group, a developer of office parks and
incubators in China, and Zhongguancun Science
Park, China’s largest such park with some 23,000
companies. Vice President Joe Biden and China’s
then vice president Xi Xinping were in the audience
at the February 2012 signing ceremony
when Hanhai chairman Wang Hanguang purchased
the property.
The park currently has 70 members, primarily
IT and cleantech companies, 20 of which are in
residence and receive a higher level of support.
Resident members are assigned managers, who
help them design a China strategy and facilitate
contacts with potential Chinese partners. Threefourths
of tenant start-ups are U.S. businesses
with plans to enter the China market, some with
Chinese-born founders; Chinese tenants include
universities or economic development zones in
China and entrepreneurs with cross-border expansion
plans.
Hanhai Z-Park is a hybrid model, an incubator
that primarily offers office and R&D space plus
incubator services. It has no structured accelerator
program but brings to the table a $5 million angel
investment fund and plans to invest $100,000–
300,000 each in selected tenant companies.
Through its relationship with Zhongguancun and
other parks, Hanhai Z-Park aims to help start-ups
scale and enter the China market. In the fall of
2013, the Park hosted its first Zhongguancun-
Silicon Valley Innovation and Entrepreneurship
Competition where twelve start-up finalists, winnowed
through several rounds of pitches and
screenings, competed for prizes of $20,000–
50,000, a tour of Z-Park in Beijing, and mentorship
by venture capitalists and experienced Chinese
and American entrepreneurs. Another player is the
Zhongguancun Development Group, an equity
investment arm of the Science Park and the City of
Beijing that focuses on high-tech, high-growth
start-ups. With RMB 10.2 billion in registered
capital, the fund works through Hanhai Z-Park to
indentify companies in the Bay Area and elsewhere
for possible funding.
Tenants include cloud computing/file sharing
company Synaptop; project management/productivity
app developer Moxtra; cloud-based text
message health management service Health-
Crowd; online dermatologist health exchange
DermLink; NanoSatisfi, a firm that leases
crowdsourced time on satellites for running
space-based research and other projects; commercial
building smart energy management
company EZ Green; and distributed wind power
generation company ArborWind. Larger Chinese
firms, among them Baidu, Tencent and
retailer Suning, have also taken space in the
park, either to do sales and marketing or to access
local engineering R&D talent.
In June 2013, a second Hanhai-affiliated incubator,
the Hanhai-Zibo Life Science Park, opened
in Burlingame to focus on biotech, cleantech, microdevices
and new materials. The $24 million,
113,000-square-foot facility is a joint venture between
Hanhai and the Zibo New and High-Tech
Industrial Park, a biotech and new materials facility
in Shandong Province which is a majority stakeholder.
The business model is similar to Hanhai Z-
Park’s with paid members. Hanhai-Zibo’s six tenants
at the time of opening relocated from the
Zibo Park.
Twenty-five U.S. companies have also been introduced
to potential partners and funders in
Shandong Province, where assistance may be provided
in finding engineers and grants may be
available from local research parks. At the start,
nearly all the members (95 percent) were local, but
the ratio is shifting as more Chinese companies (up
from 5 to 20 percent of members currently) are
seeking help coming to the Bay Area. According
to Sue Xu, Operations Director of zPark Venture,
increasing competition in China is pushing Chinese
companies to come to the Bay Area, to gain a
competitive advantage and a 6–12 month lead
time in product development on companies at
home. Like Bay Area companies going to China,
these companies receive professional advice and
introductions to potential employees and local
service partners.
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Key Industry Sectors
Hanhai is also a limited partner in QB3@953, a
biotech incubator located in San Francisco’s Mission
Bay district.
Start-up activity is also supported by Accelerator
zPark Venture, a venture fund that supports
companies housed in incubators. In its first
year (2013), the fund invested between $5,000
and $350,000 in 25 companies, 95 percent of
which are start-ups based in the U.S., with 80
percent in Silicon Valley.
HAXLR8R and Highway1, both in San Francisco,
are hardware accelerators for start-ups involved
in advanced manufacturing. Both provide
seed funding; training in design, engineering,
sourcing and supply chain; and mentoring and
contacts to take innovative hardware products
and technologies from idea to production.
HAXLR8R offers hardware start-ups with up to
four people $25,000 in seed funding; training in
sourcing, manufacturing and supply chain at a 111-
day boot camp in Shenzhen, China’s manufacturing
center; and an additional $25,000 note upon
successful completion of the program and presentation
at a demonstration day in San Francisco.
Portfolio start-ups include Melon, an EEG connected
headband device that helps enhance cognitive
function; Nomiku, designer of an affordable
precision temperature cooker that enables sous
vide cooking in airtight plastic bags; and Spark,
developer of a cloud-based open-source kit that
adds Wi-Fi to any electronic product.
Highway1 was launched in early 2013 by
an Irish electronics contract manufacturer and
fulfillment company, PCH International. PCH has
been in China since 2000, with operations in
Shenzhen’s Futian Free Trade Zone. Its U.S.
headquarters in San Francisco is a 30,000-
square-foot industrial space that houses a development
and engineering lab, a rapid prototyping
facility, a sustainable packaging facility,
collaborative workspaces for Highway1 and PCH
clients, and an events space.
Highway1 accepts up to 10 companies at a
time for its four-month program and offers
$20,000 in seed funding plus office and manufacturing
space, in exchange for 3–6 percent
equity down the road. Part of the program involves
travel to Shenzhen to tour PCH’s Chinese
contract manufacturing facilities that may eventually
make successful graduates’ products. PCH
already has a separate accelerator that has
graduated companies such as Lark, maker of a
sleep monitoring device, and MetaWatch
Strata, developer of a digital watch that can
sync to a smartphone, using Bluetooth, to retrieve
emails and text messages.
More incubators, with investment, are on the
way. CFLD, a major developer of new towns and
technology parks with 19 sites in China, will open
a technology incubator in Mountain View in 2014,
focusing on hardware and medical devices. Its
strategy is to develop companies in the Bay Area
that might one day expand to China, creating
employment in the new towns. An associated
venture fund, CFLD Capital, will provide investment
support.
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108

8. CONNECTORS
Building New Bridges
As has been noted throughout this report, the
Bay Area and greater China have benefited from
cross-border trade, investment and technology
exchanges based on an infrastructure of talent,
capital and innovation.
A changing landscape has now produced a
new set of “connectors,” oriented toward promoting
cross-broader business exchanges and
sustaining a cross-border talent and innovation
infrastructure: public-private trade and investment
partnerships at the regional, state and city
levels; privately developed incubators and accelerators;
EB-5 regional centers linking immigrant
investors with local development projects and
green cards; and sector-specific trade associations
arranging targeted cross-border contacts
and events.
A New Kind of Overseas Office
California has not had a dedicated overseas trade
and investment promotion program since 2003. A
robust program launched in 1983 within the office
of Governor George Deukmejian included
services such as export finance in cooperation
with community banks; low-cost, Californiathemed
trade show participation; and a network
of overseas offices in more than a half dozen locations.
Over time, that network grew to 10 international
trade and investment offices, supported
by domestic teams in Long Beach and Sacramento.
By the mid-1990s, these activities and an
office for foreign investment promotion were
centralized in the California Trade and Commerce
Agency, until budget cuts forced its closure.
When that occurred, California essentially had no
overseas representation.
Other sector-specific trade promotion programs
were housed within the California Energy
Commission and the California Department of
Food and Agriculture. Another network of trade
promotion centers had developed, linked to
community colleges and designed to serve small,
new-to-export firms. These programs to some
degree continue but have also suffered from
budget cuts.
A new public-private model for state trade and
investment promotion surfaced in early 2013
when Governor Jerry Brown, on a trip to China,
announced the opening of the California-China
Office of Trade and Investment, the state’s first
overseas office in a decade. The office in Shanghai
was a creative response to budgetary necessity:
the state had no funds to operate foreign
offices. In September 2012, California lawmakers
had approved legislation to allow the joint, public-private
establishment and operation of overseas
offices. This legislation paved the way for the
California-China Office of Trade and Investment
to open as a public-private partnership between
the Governor’s Office, the Governor’s Office of
Business and Economic Development (GoBiz),
and the Bay Area Council. The Council’s Shanghai
office, which had been in successful operation
for three years, provided an efficient base for
launching the new program.
The California-China Office of Trade and Investment
serves exporters throughout California,
helping them gain access to the Chinese market,
and serves as a portal for Chinese investors seeking
opportunities in California. While that investment
could go in many directions, the state sees
infrastructure projects, agriculture, online commerce,
and high tech as particular opportunities.
As China faces major energy and environmental
challenges, climate and energy will also
be an important focus. California has developed
effective environmental polices over many decades,
leads the U.S. in developing climate policy,
and is the nation’s leading center for cleantech
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Ties That Bind, 2014 Edition
development. Both share an interest in improving
energy efficiency and addressing climate change.
This led to a September 2103 MOU signed by
California governor Jerry Brown and National
Development and Reform Commission (NDRC)
vice chairman Xie Zhenhua, to cooperate on climate
change, clean energy and low carbon development—the
first agreement of its kind between
a subnational government and the central
Chinese government. This followed a separate
agreement, signed with Guangzhou Province
during the governor’s trip to China in the Spring
of 2013, to cooperate on carbon markets.
The California-China Office of Trade and Investment
is committed to raising $1 million in
private sector funds to operate the office and
support staff in California that will provide crossborder
advisory services to California businesses
and Chinese investors. Founding advisory board
members include Bank of America, Driscoll’s,
FedEx, Hanson Bridgett, HSBC, Invest LA Regional
Center, JM Eagle, MEBO International,
Royal Business Bank, Signature Development
Group, Shui On Land Limited, Silicon Valley
Bank, Sun World International, Visa, and Wells
Fargo. Critics in the past have questioned the
effectiveness of overseas offices in producing
significant new business, but Diane Long, executive
director of the Office, says that the Office
has been structured according to the best
practices of other states, has developed realistic
performance metrics, and will make improvements
as needed.
The Office’s first undertaking was Governor
Brown’s April 2013 trade mission to China. During
that trip, over $1.8 billion dollars in deals
were announced, including the investment by
Zarsion in Oakland’s Brooklyn Basin. The governor
also signed several sweeping agreements
with Chinese leaders to expand trade relations,
further knowledge and technology exchange, and
build a trans-Pacific approach against climate
change. A major success came in November
2013, when it was announced that Suning Commerce
Group, the largest retail enterprise in
China with more than 1,600 chain stores in over
600 cities in mainland China, Hong Kong, and
Japan, will open an R&D Center in the Bay Area,
its first research institute outside China. With 20
employees and $5 million invested to date, Suning
plans to increase its investment and to grow
its employee base to 200 in the next two years.
Its initial focus will be on advanced technologies,
online commerce and Internet-based retail.
Other organizations have moved to formalize
ties at the regional and city levels. The Bay Area
Council, a business-sponsored, public policy advocacy
organization for the nine-county Bay Area,
had launched a series of China initiatives beginning
with the first edition of this Ties That Bind
report in 2006, followed by venture capital and
cleantech conferences in Shanghai in 2007–08
and the opening of an office in Shanghai’s
Yangpu District in 2010 to help Bay Area firms
access the China market. Since then, the Council
has introduced 15 companies to China; 90 percent
are American, and 70 percent of those are
from the Bay Area. A steady flow of Bay Area
Council delegations have visited China, and Chinese
delegations from Shanghai and other cities
have visited the Bay Area, meeting with companies
and participating in events such as the
Council’s first U.S.-China Smart Cities Symposium,
held in San Jose in 2012.
In 2012, the Bay Area Council opened a
second China office in Hangzhou, a major technology
center south of Shanghai, and a third
office will open in Nanjing in 2014. Additional
offices in south, north and central China are
being considered.
“We’re in a good position because we’re a
non-profit—for businesses entering the China
market and trying to figure out where to go first,
trust is important, ” explains Council chief of staff
John Grubb. The Council’s office is located in the
207-acre Knowledge and Innovation Community,
an urban live-work neighborhood developed by
Shui On Land to foster technological innovation
and entrepreneurship similar to that of Silicon
Valley. The Yangpu District is also home to 14
universities and colleges.
Individual Bay Area cities are also marshaling
their China business, academic and cultural resources
to build distinct public-private networks.
ChinaSF was established in 2008, in part to organize
an upcoming China business delegation led
by then San Francisco mayor Gavin Newsom.
Since then, it has leveraged the official resources
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Connectors
of the Mayor’s Office of Economic and Workforce
Development with the business and investment
expertise of the San Francisco Center for Economic
Development (SFCED), a non-profit business
promotion arm of the San Francisco Chamber
of Commerce.
ChinaSF’s sponsors include Deloitte; developer
Lennar Urban; investment firms BlackRock,
Morgan Stanley, Hina Group and Warburg Pincus;
law firms Pillsbury, Morrison & Foerster, K&L
Gates and Nixon Peabody; architects Gensler and
HOK; commercial real estate firms CB Richard
Ellis and Kidder Matthews; and Cisco Systems.
The group’s bilingual staff works out of the Beijing
and Shanghai offices of Hina Group and Nixon
Peabody, respectively. Its work builds on San Francisco’s
longstanding relationship with China dating
back to the administration of then mayor Dianne
Feinstein and the establishment of the San Francisco-Shanghai
Sister City Committee, which
continues to lead mayoral delegations to China.
San Francisco also boasts close ties to Taiwan and
Hong Kong dating back decades.
“San Francisco is comfortable for Chinese investors;
there’s a large Chinese community here
and they see a lot of opportunity in the Bay
Area,” says ChinaSF executive director Darlene
Chiu Bryant. “And now we have a Chinese mayor
who is seen as very friendly to Chinese investment,
and that helps as well.” For many Chinese
firms, the city’s geographic location and international
focus are also an attraction. “A lot of companies
have made their name in China and want
to become global,” she explains. “They can
come to San Francisco, cross fewer time zones,
and access 75 countries through our network of
trade offices and consulates.”
Since 2010, ChinaSF has been instrumental
in bringing to San Francisco China’s Bank of
Communications and solar firms Trina Solar,
Yingli Green Energy, GCL Solar Energy and
ReneSola, and in helping online game developer
Shanda Holdings expand its Bay Area presence.
In June 2012, San Francisco entered into a
memorandum of understanding (MOU) with
China’s National Energy Conservation Center—
part of the National Development and Reform
Commission—to undertake technical cooperation
in promoting energy efficiency. Putting the
MOU into action, an initial step has established
a partnership with the city of Nanchang in Jiangxi
Province for cross-border business and
technical exchanges on two large development
projects of comparable type and scale: San
Francisco’s 500-acre Hunters Point Shipyard
project and Nanchang’s 200-acre mixed use
development, also to be built on former industrial
land. A key provision encourages participation
from Chinese and Bay Area financing, suppliers,
vendors and subcontractors.
ChinaSF partnered with another San Franciscobased
connector, the China-U.S. Energy Efficiency
Alliance, to secure the MOU, and the two
organizations are assembling a delegation of energy
efficiency firms with proven business models
and technologies to visit Beijing, Tianjin,
Chongqing and Qingdao in 2014. The Alliance
includes among its members California’s major
utilities, the state Public Utilities and Energy
Commissions, Bay Area clean energy companies,
Lawrence Berkeley National Laboratory and the
Natural Resources Defense Council.
A second San Francisco MOU signed in 2013
with the China International Culture Association
provides an official door for future cultural and
artistic exchanges with organizations throughout
China, a development that should significantly
benefit the city’s Asian Art Museum.
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Ties That Bind, 2014 Edition
The Asian Art Museum: Come for the Art
San Francisco’s Asian Art Museum houses a world-class collection of
classic and modern Chinese art—the largest in the Western Hemisphere—and
regularly hosts both large and small scale visiting exhibits.
The museum is already a draw for Bay Area residents and visitors,
and museum director Jay Xu would like more visitors from China to
experience it. Xu says that a dual-track strategy is needed to fully leverage
this valuable asset—one that combines community support and
more concentrated, coordinated tourism promotion. “Our museum,
like others, forms a very important pillar of the economy—cultural
tourism,” he says. “China should be one of the big growth areas.”
112
The year-long Celebration of Shanghai series of exhibits and programs
in 2010, tied to the World Expo in Shanghai at the time, provides
a template. The Asian Art Museum provided a focal point for 30 programs
hosted by 15 different China-related cultural organizations.
An early 2013 exhibit of terra cotta warriors from the burial complex
of Emperor Qin Shihuang in Xi’An, Shaanxi Province featured a
reception with Chinese-American organizations, reprising an earlier
exhibit in 1994 that was the Museum’s best-attended event.
Xu is optimistic about increasing Chinese tourist traffic at the museum.
While most travelers from China currently come to the Bay Area
on package tours, he’s counting on the trend of more affluent travelers
visiting on their own and looking for a richer cultural experience.
There is an added challenge of expanding museum exhibits beyond
traditional art, that involves complex relationships with Chinese
museums, galleries, collectors, artists and government agencies. While
there are established procedures for curating cross-border exhibitions
of classic works with national and provincial museums, similar arrangements
for contemporary art are still uncharted territory in terms
of logistics, liability, documentation and government involvement. All

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must be handled on a case-by-case basis among multiple parties,
adding to cost and risk.
Xu is hopeful that tourist and exhibition obstacles will recede over
time, and that the Asian Art Museum can become a cultural hub connecting
and promoting understanding between the Bay Area and
China. The City of San Francisco’s new cultural MOU with the Chinese
government should help. “With the rise of Asia, the museum becomes
all the more relevant,” he says. “It connects art to life and offers a
platform to help people be better informed about Asia—a hub where
people from all walks of life connect.”
The City of San Jose launched its own connector,
China Silicon Valley, in June 2013. The
group’s mission is to attract inward Chinese investment
by providing access to local government
and business leaders and to supportive
regulatory, tax, legal, and other services.
Board members include Hanhai Z-Park general
manager Victor Wang; East-West Bank first vice
president Stephanie Xu, a commercial real estate
and EB-5 specialist; and Fred Greguras, a partner
with Bay Area law firm K&L Gates, specializing in
cross-border M&A. Business partners include the
Chinese Entrepreneurs Association, Stanford University,
global commercial real estate firm Colliers
International, the Pillsbury law firm, the California
Development EB-5 Regional Center, the Singer-
Lewak tax practice, and the cities of San Jose,
Sunnyvale, Cupertino and Campbell.
China Silicon Valley is particularly targeting
large Chinese companies willing to locate manufacturing
and R&D facilities that create jobs in
areas with high commercial vacancy rates or, as in
locations such as North San Jose, in areas with
large tracts of available industrial land. Development
of this kind can, in turn, attract additional
investment from EB-5 and other sources. The
group is talking to large potential Chinese partner
firms that already have presences in Silicon
Valley and has met with officials of Guangzhou’s
Yiexiu District in Guangdong Province to explore
investment prospects. It plans to open offices in
Shanghai and Beijing.
The EB-5 Advantage
In an earlier discussion of visas in this report (see
“Visas: The School-to-Work Transition” in the Chinese
Students at Bay Area Universities chapter),
the EB-5 visa program was referenced in the
context of investors pursuing green cards with a
dual strategy: as insurance in case they want to
relocate abroad and as a way to enroll their children
in U.S. schools or universities at resident
tuition rates.
The federal EB-5 program, established in
1990, has emerged as a potentially valuable economic
development tool for cash-strapped cities
and counties in California and as a source of
funding for both large and small-scale projects.
This is particularly the case as California’s redevelopment
program and its network of 400 local
redevelopment agencies with bond-issuing capacity
was eliminated in 2012. Given this economic
environment, Chinese investors and California
cities and counties have found their interests
aligned, and regional centers (RCs) are
emerging as key points of intersection.
Under the EB-5 program, investors, their
spouses and unmarried children under 21 become
eligible to apply for a permanent resident
visa (green card) if they make a $1 million investment
anywhere in the U.S. that results in the
employment of at least 10 qualified individuals,
or if they make a $500,000 investment in rural or
high-unemployment areas or through a government-approved
EB-5 non-profit regional center
that syndicates investments to fund larger development
projects.
Regional center investments operate on a fiveyear
time frame, coinciding with the EB-5 visa
process. During that period, the investment must
generate at least 10 full time jobs per investor
within two years.
At that point, investors are eligible for conditional
resident visas similar to those granted to
spouses of green card holders. They may exit the
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Ties That Bind, 2014 Edition
investment at any time after the job-creating
conditions of the EB-5 are met, and after five
years residing in the U.S. they are eligible for a
permanent green card. Regional centers typically
charge fees in the $50,000 range to administer
the project investments, reporting requirements
and visa processing.
Investments have different characteristics and
offer varying types and levels of return, so exits
may come well before the five years or well after.
Most investments made through regional centers
are passive, but they must be structured and
represented as “at risk” investments, not loans
for which returns are guaranteed. Qualifying jobs
created can be direct—hotel desk clerks, customer
service representatives, manufacturing line
workers, event planning and catering staff—or
indirect in construction or services from vendors
and suppliers, such as room furnishings or landscaping.
Jobs do not have to be specifically
identified and can be calculated using federallyapproved
statistical models.
A total of 10,000 EB-5 visa slots are allocated
nationwide each year; up to 3,000 are made
available for investment in targeted employment
areas (TEAs), and up to 3,000 are available for
investments through regional centers. U.S. Citizenship
and Immigration Services (USCIS) figures
show that since the EB-5 program’s inception, it
has attracted $6.2 billion in investment, created
49,000 jobs, and issued more than 13,000 permanent
visas to investors. As of July 2013, USCIS
reported 18 approved Bay Area regional centers,
out of more than 80 registered in California.
The proliferation of RCs—from 11 in 2007 to
more than 300 in 2013—and dubious operators
can crowd the market and at times damage the
reputation of an otherwise beneficial program.
Applications to create new EB-5s surged several
years ago as registration fees were about to be
hiked, but less than 20 percent of those regional
centers are currently active. Chinese investors,
mostly individuals, may be sophisticated but often
rely on friends for advice and need help understanding
what is and isn’t a good project in
the U.S. Some EB-5 developers see the program
as easy money, so investors need to be cautious.
A case in point is the February 2013 Securities
and Exchange Commission lawsuit against
29-year-old Anshoo Sethi, charging that his
Chicago RC fraudulently raised $145 million in
investments and another $11 million in administrative
fees from 249 mostly Chinese investors
for a dubious green hotel and convention center
project next to O’Hare International Airport, on
vacant land owned by Sethi’s family.
Such cases are rare but highlight weaknesses in
the EB-5 program. Targeted Employment Areas,
which permit lower investment in disadvantaged
areas, are subject to manipulation. Regional centers
are lightly regulated and monitored on the
front end, and rules can be vague or contradictory
regarding marketing representations, fee structures
and project milestones. Detailed assessments
take place when investors submit I-526 petitions
for conditional visas as job requirements are met
(up to two years into the process), or later when
they file I-829 petitions for the government to remove
conditions and grant a permanent visa.
USCIS can decertify an RC and/or deny an I-
526 for not meeting investment requirements.
Projects—and the green cards they are to generate—may
therefore be disallowed after the investment
funds have been spent. In a 2012 case,
for example, 23 foreign investors sued USCIS for
disallowing visas relating to a warehouse project
in Riverside, California after the investments had
already been made. USCIS ruled that the RC
could not count jobs created by tenant businesses
after the warehouse was completed. The
USCIS California service center saw its backlog of
I-526 cases double from fewer than 3,000 in May
2012 to more than 5,800 in April 2013, with the
oldest cases dating back a year; pending I-829
petitions, by contrast, dropped sharply from
2,500 in late 2011 to around 700 in March 2012
and have held at those levels since.
As shown in the following tables, the annual
percentages of I-526 and I-829 petitions approved
over 2005–12 increased until 2012, in part
due to the volume of petitions received and the
resulting backlogs. The surge in volume is mainly
attributable to Chinese applications. For the first
time in the program’s history, EB-5 applications
are approaching the total cap of 10,000 visas; of
7,600 applications in 2012, more than 6,100 were
from China, and USCIS is now reportedly considering
a country cap.
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USCIS Service-Wide Receipts, Approvals, Denials (Fiscal Years, 2005–2012)
Form I-526, Immigrant Petition by Alien Entrepreneur
Fiscal Year Receipts Approvals Denials
Approval
Percentage
2005 332 179 156 53%
2006 486 336 124 73%
2007 776 473 148 76%
2008 1,257 640 120 84%
2009 1,028 1,262 207 86%
2010 1,955 1,369 165 89%
2011 3,805 1,563 371 81%
2012 6,041 3,677 957 79%
Grand Total 15,680 9,499 2,248 81%
Source: USCIS; Association to Invest in the USA (IIUSA)
Form I-829,
Petition by Entrepreneur to Remove Conditions
Approval
Fiscal Year Receipts Approvals Denials Percentage
2005 37 184 112 62%
2006 89 106 108 50%
2007 194 111 49 69%
2008 390 159 68 70%
2009 437 347 56 86%
2010 768 274 56 83%
2011 2,345 1,067 46 96%
2012 712 736 60 92%
Grand Total 4,972 2,984 555 84%
Source: USCIS; Association to Invest in the USA (IIUSA)
Two Local Examples
The San Francisco Regional Center (SFRC),
based in Oakland, structures its projects like private
equity funds. Three projects—two Call
Socket customer service call centers and Comprehensive
Care of Oakland, a subacute care
nursing facility affiliated with Kaiser Permanente—have
launched, delivered their financing
and obtained conditional or permanent green
cards for 80 investors. When fully operational,
those projects and a planned third call center will
generate over 2,000 jobs. SFRC CEO and Bay
Area real estate investor Tom Henderson is planning
more projects, including a restaurant, an
LED lighting company, a company that produces
and distributes hearing aids, and a third-party
logistics company. The companies are located in
buildings that Henderson has acquired, including
Oakland’s Tribune Tower and a 90,000-squarefoot
industrial building near the Port of Oakland.
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Ties That Bind, 2014 Edition
He has also leased 30,000 square feet at 1355
Market Street in San Francisco, in the same
building occupied by Twitter, to house an EB5-
funded incubator.
Henderson has a background not only in real
estate but in import-export, primarily with Asia.
Most of his investors—about 80 percent—are
mainland Chinese, and the rest are from Hong
Kong, Pakistan, Singapore and Vietnam. His
investors are sophisticated, understand the EB-5
rules, and are adept at analyzing business proposals.
“It’s the project that drives investors,” he
says. “The Chinese from China are the smartest
in the world; they’re capitalists in a communist
country, they have to deal with competitors on
the ground while protecting themselves from
the government.”
He is skeptical of most regional centers and expects
many will end up suspended by USCIS for
inactivity. He is also wary of centers tied exclusively
to real estate and to large projects requiring too
many investors without a sound underlying value
proposition in specific growth sectors. Pure real
estate plays are complex, Henderson maintains,
requiring an LLP, an environmental impact report
and other supporting documentation translated
into Chinese. “A lot of RCs go out with five pages,
sometimes even just one page,” he says, noting
that other RCs appear to have no clear business
plan or sectoral expertise; they apply for the
broadest geographic scope and industry mix possible
and shop for projects.
Like Tom Henderson at the San Francisco Regional
Center, Ginny Fang, CEO of the San Francisco
Bay Area Regional Center (SFBARC), has
seen success. SFBARC was initially approved in
2009 and was reorganized under its current leadership
in 2011 when Ginny Fang left her position
as ChinaSF’s founding executive director to lead
SFBARC’s efforts to direct EB-5 financing into
job-creating enterprises in the San Francisco Bay
Area. The principal focus of SFBARC’s EB-5 funds
is the 495-acre Hunters Point Shipyard site in San
Francisco, a former U.S. Navy shipyard being redeveloped
by Lennar Corp.
Helping to finance development at the Hunters
Point Shipyard, the first of two SFBARC funds,
covering street, utility and sewer infrastructure,
raised $27 million from 54 investors. The second,
to help fund housing construction, raised $50
million. SFBARC proceeded with a third fund for
the Shipyard, with investors in all three funds
coming from nine different countries.
Fang says an RC is a good route for prospective
EB-5 investors because it manages both the
investment and the visa details and is a regulated
entity with reporting requirements. It also allows
investment at the lower $500,000 level (“At the
$1 million level it’s often difficult to find someone,”
she says), and since Hunters Point is in a
high unemployment area, investors are eligible
for both the RC and the targeted employment
area allocations, making them less likely to be
closed out in a given year if either category
reaches its limit.
Lennar’s Kofi Bonner agreed that EB-5 investors
have been important to Hunters Point.
When Lennar’s financing discussions with the
China Development Bank (CDB) ended in early
2013, the project already had been courting EB-
5 investors. The publicity around the CDB talks
had raised the profile of both Lennar and Hunters
Point in China.
For Hunters Point, Bonner describes a series
of tranched deals with offerings made only for
specific activities the investor funds will go toward.
Through the second fund, 88 townhouses
and condos were under construction by mid
2013 and construction was scheduled for another
159 residential units, bringing the total to
247 for 2013. Approximately 280 more are
planned for 2014, with the infusion of an additional
$100 million in investment.
A key factor for investors is how the EB-5 and
overall development timelines mesh: since large,
complex construction projects like Hunters Point
have prolonged construction time frames surpassing
two years, construction jobs can be
counted toward fulfilling the EB-5 mandate to
meet the two-year initial job creation requirement
for investors to get their conditional visas. “Large
residential projects can qualify as EB-5 projects
due to their lengthy employment of construction
labor beyond two years,” Fang explains.
Given that, large real estate development
projects—housing, hotels, shopping centers—
are attractive because they are job generators
at all stages. And if a big name architect, builder
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or company is behind the project, that gives
investors an added comfort level. “There are
hundreds of regional centers registered, but if
you’re out in China, there are probably only
about ten names you hear about in terms of
actual projects.” SFBARC is now considering
potential projects throughout the State
of California.
To maximize investment prospects, some RCs
try to identify development sites and projects in
rural locations or targeted unemployment areas
(TEAs), defined by law as areas where unemployment
is at least 50 percent higher than the
national average. With nationwide unemployment
in the 8–10 percent range over 2009–11,
RCs tended to shop for projects in counties with
pockets of 12–15 percent unemployment: Oakland,
Richmond, Eastern Contra Costa County,
the Central Valley, East Palo Alto and North San
Jose. Some examples of other regional centers
in the Bay Area include the following:
California Energy Investment Regional
Center, with offices in Cupertino, Fresno and
Sacramento, focuses on solar farms selling
electricity to utilities, advanced extraction fracking
rigs, and reopening closed ethanol plants.
California Wineries and Vineyards Regional
Center in San Mateo invests in winery and vineyard
properties in Napa and Sonoma County
TEAs; it has recruiting and support services affiliates
in the PRC, Hong Kong, Japan and Korea.
Regional centers from outside California are
also stepping in. The Kor Group is renovating the
vintage but run-down Renoir Hotel in San Francisco’s
mid-Market area with $40 million in Chinese
investment from EB5 Global, a regional center
based in Portland. In addition to accommodations,
the boutique hotel will have several bars and restaurants
to capitalize on its mid-Market location
adjacent to expanding companies such as Twitter,
Dolby, Square, and Yammer and to large housing
developments under construction nearby.
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118

Paths Forward
As the Economic Institute found it its 2006 study,
the San Francisco Bay Area enjoys a depth and
density of economic connections with China that
is unique in the United States. This reflects more
than 160 years of interaction that has produced
demographic ties and a depth of cultural intelligence
regarding China that is difficult to find
elsewhere. It also reflects the fact that the Bay
Area’s economic strengths—in technology, urban
design and environmental planning, life sciences,
innovation, and entrepreneurship—mirror China’s
own needs and priorities. While the business and
policy landscapes are complex, this presents the
Bay Area with major opportunities for growth and
leadership, as China continues to expand its
presence on the global economic landscape.
Several specific areas of opportunity emerge
from this analysis.
Higher Education
Because of the large number of colleges and universities
in the region and the presence of worldrenowned
institutions such as Berkeley and
Stanford, the Bay Area is a major destination for
students from greater China. China consistently
vies with India for the top position as an overseas
source of students. This flow remains strong and
is likely to grow. The Bay Area benefits from the
direct spending of those students but more importantly
from the energy and skills they ultimately
bring to the economy. Even those who
return to China bring benefits through the personal
and business ties they develop with the
region, enabling further trade and investment.
For public colleges and universities (UC and
CSU), however, it would be unfortunate if Chinese
and other foreign students (who pay full
tuition) were to be seen as an adequate substitute
for long-term investment by the state in its
higher education system. Budget cuts to higher
education can also undermine the long-term
global competitiveness of the state and its economy.
Continued investment in public higher education
in California is essential.
As more U.S. and international universities and
business schools open campuses and offer programs
to connect students with the region’s innovation
and entrepreneurial system, the potential
for a greater presence by Chinese universities is
growing. Strong Bay Area alumni networks from
leading Chinese universities offer a unique foundation
to build on.
There are also outbound opportunities. The
100,000 Strong Initiative, launched by former
secretary of state Hillary Clinton in 2010, aims to
send 100,000 U.S. students to study in China by
2014. The 100,000 Strong Foundation, created in
2013, is tasked with carrying out the Initiative,
and the Chinese government is offering scholarships
for 20,000 U.S. students to study in China.
As of early 2013, approximately 6,500 U.S. students
had taken advantage of the program. Bay
Area students studying in China can help to build
both cultural intelligence and relationships that
will support stronger economic ties.
Tourism
The growing flow of Chinese tourists venturing
overseas, their increasing wealth, and the fact
that more are traveling independently all suggest
that tourism will remain a major area of opportunity
for the region. The Bay Area’s location on the
West Coast, iconic attractions, easy access
through SFO, and cultural receptiveness to Chinese
travelers make it a natural destination.
Immigration
In the last two decades, students from China have
chosen to remain in the Bay Area in large numbers,
populating research laboratories, founding
companies, and becoming venture capitalists.
Current policy, however, makes it unnecessarily
difficult for many of these graduates to stay and
contribute to the economy. Immigration reform is
needed to (1) remove country quotas for green
cards (which are quickly exhausted for high-volume
countries such as China), (2) make it easier
for entrepreneurs from China and other countries
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Ties That Bind, 2014 Edition
to stay in the U.S. to found companies, and (3)
enable foreign graduates of U.S. universities with
advanced degrees in STEM fields to secure green
cards on an expedited basis.
Energy and Climate
Despite policy differences, China and the U.S.
share a common interest in reducing the longterm
consumption of fossil fuels, increasing the
production of renewable energy, improving energy
efficiency and addressing climate change.
California leads the nation in its commitment to
addressing these issues and in the progress it has
made. This is particularly true in the Bay Area,
where the state’s cleantech industry is concentrated
and where government, university, and
industry initiatives offer a rich foundation for dialogue
and cooperation.
Investment
As China begins to send ever larger volumes of
investment capital around the world, California
and the Bay Area are positioned to capture an
outsized share. Because of its strength in smaller,
entrepreneurial and technology-based companies,
the region is more likely to attract investment
from private Chinese companies than from
larger state-owned enterprises. Areas of particular
opportunity include real estate, healthcare,
hospitality, and technology.
Supplementing direct investment by larger
commercial entities, the EB-5 program is a
promising vehicle to expand Chinese and other
foreign investment, and it can play an important
role in financing infrastructure, housing, and new
businesses, particularly in the wake of the 2013
closing of California’s redevelopment programs.
Overseas investors, however, need more security
and transparency. The EB-5 program for
regional centers, which is currently only a pilot
and is subject to annual extensions, should be
made permanent. USCIS should also be given
the resources required to expedite applications
processing (which currently can take as long as
18 months), advance priority projects, and exercise
better oversight and screening of questionable
or ineffective regional centers.
Connectors
While China will remain a sometimes controversial
topic in Washington, states, regions, and
private companies tend to see China pragmatically.
More than most, the Bay Area has shown
an affinity and openness to China. Ever since the
historic creation of the Shanghai-San Francisco
Sister City Committee, the Bay Area has shown
that it is prepared to reach out to develop new
relationships and channels. New intermediary
entities such as ChinaSF and the Bay Area
Council’s Shanghai and Hangzhou offices exemplify
this trend and provide platforms for continued
business growth. The State of California’s new
China office gives California an official presence in
China for the first time in a decade. For organizations
that play this role, investment attraction will
be an increasingly important focus.
Conclusion
These opportunities do not mean that China will
be an easy place to do business or that significant
barriers don’t exist. China’s economy is slowing,
labor costs are rising, and competition from
Chinese firms is increasing, both in China and
overseas. Cyber security, intellectual property
protection, lack of transparency, and government
policies that often force technology transfer or
favor national companies will remain significant
issues for both businesses and policymakers.
Bay Area companies, however, have demonstrated
their capacity to succeed in China’s often
challenging environment, and local government
has chosen to lead as well. With this experience,
the region is in a strong position to interpret
China to the U.S., and the U.S. to China, as it
continues to build a positive, multifaceted relationship.
As the Economic Institute found in its
2006 report, as China grows as a major force in
the world economy, the San Francisco Bay Area
continues to occupy the pole position among its
potential U.S. partners. Because of the scale of
this opportunity, it merits continued investment
by both the public and private sectors.
120

Acknowledgments
This study was developed and written by Dr.
Sean Randolph, President & CEO of the Bay Area
Council Economic Institute, and Niels Erich, a
consultant to the Institute who also worked on
the original 2006 edition.
The Institute wishes to thank the following
sponsors, without whose support this study could
not have been produced.
Deloitte LLP
Gensler
Jeffrey Heller
Pillsbury Winthrop Shaw Pittman LLC
Port of Oakland
SFO
Silicon Valley Bank
Skidmore Owings & Merrill LLP (SOM)
United Airlines
Woods Bagot
We are also grateful to the many individuals
who generously shared their expertise through
personal interviews. Their insights regarding the
trends and issues impacting their organizations
added critical insight to the analysis.
Gordon Hein
Asia Foundation
Charlene Yu Vaughn
Asian American MultiTechnology
Association (AAMA)
Mark Perry
Bank of America
John Grubb
Bay Area Council
Gail Maderis
BayBio
Michael Keyoung
Burrill & Company
Barry Sedlik
California Business Ventures
Diane Long
California-China Office of Trade and Investment
Regis Kelly
California Institute for
Quantitative Biosciences (QB3)
Eric Zwisler
Cardinal Health
Darlene Chiu Bryant
ChinaSF
Ben Chen
China Unicom / Chinese Enterprise Association
Joseph Lin
Chinese American Semiconductor Professional
Association (CASPA) Advisory Board
Xia Xiang
Chinese Consulate General
Joe Yang
CHT Global
Gordon Feller
Cisco Systems
Matthew LeMerle
Concept Art House
Chris Cooper
Deloitte & Touche LLP
Jiang Lin
Energy Foundation
Jennifer Gee
Gap Inc.
Dan Winey
Gensler
Jeffrey Heller
Heller Manus Architects
Hanson Li
Hina Group
Subrina Chow
Wendy Au
Hong Kong Economic and Trade Office
Gary Yao
HTC
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Ties That Bind, 2014 Edition
Lee Ting
H&Q Asia Pacific
Leslie Yuan
Hua Yuan Science and Technology
Association (HYSTA)
Dean Sirovica
Alison Jenkin
Huawei Technologies
Sean S. H. Wang
ITRI International
Mark Levine
China Energy Program
Lawrence Berkeley National Laboratory
Kofi Bonner
Lennar
Chris Chiang
Marvell Technology Group
Brad Tewksbury
Oracle Corp.
Bruce Quan
Peking University
Thomas Shoesmith
Pillsbury
Ginny Fang
San Francisco Bay Area Regional Center
Jeff Hoglind
San Francisco International Airport
Tom Henderson
San Francisco Regional Center
Tom Kiely
SF Travel
Mike Ghielmetti
Signature Development Group
Kenneth Wilcox
Silicon Valley Bank
Gene Schnair
Skidmore Owings Merrill (SOM)
John Pearson
Stanford University
Rob Steinberg
Steinberg Architects
Alan Wong
Suning Commerce R&D Center USA
Bruce Fuh
Taipei Economic and Cultural Office
Jerchin Lee
Taiwan Trade Center
Tim Dattels
TPG
Mark Mendenhall
Trina Solar
Yingyi Qian
Tsinghua University
Bob Garrett
Union Bank
Dan Weiss
Melinda Yee Franklin
United Airlines
Ivor Emmanuel
University of California, Berkeley
Stanley Kwong
University of San Francisco
David Katz
Visa
David Lam
West Summit
Carsten Voecker
Woods Bagot
Sue Xu
zPark Venture
122

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129

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Pollack, Andrew. “Chinese Company to Acquire
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Riddell, Lindsay. “China’s Gold Rush.” San
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Connectors
Arns, Christopher. “California opens trade office
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Cain, Josh. “Darlene Chiu Bryant hunts new deals
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131

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